When Willie Sutton, the prolific bank robber, was asked why he robbed banks, he answered, “because that’s where the money is.” When asked by investors in early 2010, why we were starting a seed fund focused on enterprise and leveraging NYC, I answered with Willie’s quip but also said, “because that’s where the customer-driven talent is.” One of the key criteria for successful enterprise investing besides team, product, and huge markets is ensuring that you invest in a “must-have” and not a “nice-to-have” solution. When companies are born out of real pain, more often than not this criteria is wholly satisfied!

I bring a unique perspective to this conversation having been a VC based out of NYC for the last 19 years (wow — am I dating myself!). While I have had my fair share of failures, I have also been a first round investor in many enterprise successes both in and outside of NYC, including leading or seeding the first round in LivePerson ( NYC, current market cap of $650mm), Greenplum (sold to EMC, now Pivotal), GoToMeeting (sold to Citrix, now Citrix Online doing over $600mm+ revenue), Divide (NYC, sold to Google), blaze.io (sold to Akamai), GoInstant (sold to Salesforce.com) and a few others.

Necessity is the mother of invention

As I think about common characteristics of great enterprise startups that I have had the pleasure to work with in NYC, I think about entrepreneurs building companies based on great pain, a deep understanding of the customer problem because they are customers themselves, and from that, using their computer science backgrounds to engineer a better and more scalable solution. Many of these great founders are simply hidden in larger companies, developing software for non-tech firms and functioning where tech is more of a support role versus front and center in terms of driving revenue growth. This is much different from entrepreneurs leaving established software vendors wanting to create a bigger, better, and cheaper mousetrap with a “great technology in search of a problem to solve.” While starting with a customer pain is great, the big question for many of these startups is whether or not this pain is a one-off or a market problem that is massive enough to attack.

Success Breeds Success

Divide

When we first met Andrew Toy and Alex Trewby in mid-2010 they were VPs Wireless at Morgan Stanley and experiencing a huge pain point — employees were bringing in their iphones and android devices for personal use while still using their blackberrys for corporate purposes. Like any great entrepreneur, they asked the question, how do I solve this problem with software and allow companies to have the peace of mind and security policies needed for them while also allowing employees to use their existing devices. The challenge was to create a separate sandbox that could be easily used and understood. Rather than forking off android, Andrew and Alex built an App, something consumers could easily understand and yet make it easy for huge enterprises to deploy. The big bet in 2010 was that we would move to a BYOD world and that Android would become a dominant mobile platform (at that time, it was a big bet!) Hence Divide was born and 4 years later sold to Google and now branded as Android for Work with a stated goal of being on a billion devices. Pretty cool for two ex-technology execs at a financial services firm!

Security Scorecard

We first met Alex Yampolskiy and Sam Kassoumeh in-mid 2013. They were both formerly Chief Security Officers at Gilt Groupe and were experiencing major pain in their day to day jobs. They were in charge of auditing the security of every vendor that touched the Gilt platform and all of it was done manually through intensive Q&A and when in doubt, via an expensive security audit from a consulting firm. As Alex and Sam spent many cycles on this method, they asked themselves if they could continuously scan the security of their partners in a non-intrusive way. It was already clear that software was moving to the cloud but less certain was the belief that a company is only as secure as its least secure partner and continuous monitoring would be imperative. From this, security scorecard was born. SecurityScorecard provides precise global threat intelligence and risk awareness continuously and non-intrusively so businesses and their partners can collaboratively predict and remediate data security issues. Fast forward 15 months from the initial seed round, and they have landed several large customers and closed a $12.5mm Series A with Sequoia Capital, founding investors in some phenomenal, multi-billion dollar security companies — netscreen, palo alto networks, and fireeye.

I could go on and on about many other great enterprise companies in NYC, but you get the point — find a massive pain that you are experiencing and living with first hand and create a software solution around this. It is this unique understanding of the customer that we will see time and time again as new enterprise-related startups in NYC are launched. It is also this deep domain expertise and understanding of the customer that will allow many enterprise startups in NYC to flourish, especially as we live in a cloud-based world where switching costs are not as high as they once were.

Bottom Line

The idea of NYC enterprise startups succeeding should no longer be a laughing matter. We have great entrepreneurs, companies, talent, and investors ready to capitalize on Willie Sutton’s vision — NYC is where the money is (see Jonathan Lehr’s great overview on NYC Enterprise Tech). We at boldstart ventures feel quite fortunate to be invested in a number of enterprise related startups in NYC like security scorecard, divide, truly wireless, handshake, yhat, and bowery.io and are excited about the future of enterprise tech in NYC. We have seen more success stories in the last 3 to 4 years versus the 10 years before that, and we expect this rapid innovation to continue. While many of these companies are engineers coming from large Fortune 1000 type companies here in NYC, we are also increasingly seeing founders leaving the more established tech companies like Google, OnDeck Capital, and Gilt to pursue their dreams.

As I write this I am wondering who the next entrepreneur will be that is hidden in the bowels of a more established company, feeling massive pain everyday, and ready to launch the next unicorn like MongoDb. Is that you?

]]>http://www.beyondvc.com/2015/03/take-enterprise-tech.html/feed0boldstart ventures in 2014 – our ethoshttp://www.beyondvc.com/2014/02/boldstart-ventures-2014-ethos.html
http://www.beyondvc.com/2014/02/boldstart-ventures-2014-ethos.html#commentsWed, 12 Feb 2014 15:13:35 +0000http://www.beyondvc.com/?p=644As we look into 2014, we thought it was important to reflect on our activities in 2013 and refocus and refine our thinking and messaging as a firm. We are thematic in our approach and primarily known as seed investors with a focus on enterprise and companies that can scale quickly. To date our messaging has been clear, but we also could not ignore the fact that companies like Plain Vanilla Games took off quickly and became known as the fastest growing mobile game in history. The challenge for us is how to explain this in a focused, simple manner.

Here is our attempt and then I will break down how it all ties together:

boldstart's messaging
We have over 20 years of experience backing bold founders with big visions. Our founding team has led first rounds in market leading enterprises such as LivePerson (LPSN), GoToMeeting (sold to Citrix), Greenplum (sold to EMC), and 24/7 Media (TFSM). BOLDstart helps founders at the seed stage accelerate their growth from idea/ alpha phase to product market fit and successful Series A round. With a focus on seed investing in the mobile, agile, and smart enterprise and business models that harness the power of network effects, our entrepreneurs have successfully been able to raise over $200 million of financing following our initial seed investment. Founded in 2010, we have backed 27 awesome teams including Indiegogo, divide.com (sold to google), goinstant (sold to salesforce), blaze.io (sold to Akamai), thinknear (sold to telenav), Plain Vanilla Games (quizup), rapportive (sold to LinkedIn), and klipfolio.

ok, so let's break down the key elements of our message:

"We have over 20 years of experience backing bold founders with big visions.”
That is pretty self explanatory. However, to add to this, we love entrepreneurs who have big visions but of course, start with an incredibly focused product. This means we invest in product-driven engineering teams where all of the development is done in house and where rapid iteration is a key to success.

"helps founders at the seed stage accelerate their growth from idea/ alpha phase to product market fit and successful Series A round”
While this sounds simple, there is a ton of work that goes into helping our portfolio companies get to a successful Series A. This includes thinking through what milestones the startups will need to hit to make them attractive for an A round and ensuring there is real plan with enough cash (typically 18 mos) and runway to get there. Since most of our companies have a product that is in alpha stage (super early, buggy), we like to help our entrepreneurs get more market data and customer feedback through our relationships to help them further refine their product.

We also help our teams find key engineers, and sales and marketing folks who can help build and refine the gotomarket strategy for the entrepreneur. Finally, we try to prewire the Series A investment by getting our portfolio companies to meet with the right partners at the right firms early on before they even need money. Getting feedback from smart Series A funds helps the entrepreneur further hone their message.

"focus on the mobile, agile, and smart enterprise"
The big trend in technology today is the growth of mobile. The other force we always hear about is the consumerization of technology meaning that much of the innovation in design, applications, and user interface is driven by consumers first (think Facebook, twitter) and then brought into the enterprise or business after the fact. Yammer would be a great example of a Facebook like feed being brought into the enterprise and then being sold to Microsoft for $1.2 billion. Here at BOLDstart, we believe we are still at the very beginnings of this consumerization trend in the enterprise and hence our focus on the “mobile and agile enterprise.” Many of our portfolio companies in BOLDstart II reflect this theme such as Truly Wireless and handshake .

The other big theme is one of big data. As you know, we believe big data is passé and the real trend is smart data or what you do with the big data that matters. Storing and scaling tons of data cheaply and efficiently is already done. Smart enterprises are analyzing all of this data to make better decisions, increase revenue, and improve operating performance. Making sense of that data with algorithms and other software is the next wave and is reflected in investments like Coherent Path, klipfolio, security scorecard, and preact .

“companies that harness the power of network effects”
we are really investing in companies that can scale rapidly with zero to limited to market costs. Another way we think about this is that we fund products or companies that derive most of its growth by users recruiting other users. In industry terms, this means we looks for companies that have a high viral coefficient. Since we can’t predict the future, our investments in these types of companies are driven by small data sets that we can extrapolate to determine the potential opportunity and usage. For example, when we funded Plain Vanilla Games (Quizup), the team had launched a small test app in Europe called Eurovision Quizup where they were able to sign up 10,000 users in a week and one month later still had 30% of the users come back up to twice a day for 30 minutes a day. Given that other analogs like Words With Friends (scrabble) and Draw Something (dictionary) were quite successful and that no one had done Trivial Pursuit in the right manner, we decided to back the company in the seed round. As they say, the rest is history. We have taken this same approach with other networked investments like memoir.

finally, this theme is also applicable for b2b...
There is also a b2b theme as companies like ooomf and emissary.io are leveraging network effects, viral marketing, and growth hacking to ramp up their user base in the enterprise side. In addition, many enterprise software companies are exposing their functionality/service via APIs so other developers can easily build upon their platforms. APIs are the new business development models for these companies and once again represent many of the elements of consumer platforms. Companies like yhat, zillabyte, and goinstant fit this model.

In the end, we believe that we are better investors in the agile and mobile enterprise because of our front row seat investing in innovative, networked consumer companies. Companies like Plain Vanilla Games and Memoir help inform our thinking on what may/may not work from an enterprise perspective. The long term trend in the enterprise that we have been investing in for years is bottom up marketing. Instead of selling at the C-level, companies are better off getting one user in a department to use a product and then building in viral hooks and loops to help bring other employees on board. This is yet another example of the consumerization of tech. One of our most recent investments which is in stealth mode (will be announced shortly) is a great example of this - 3 users began to use the enterprise product and within 2 weeks, 42 of 45 employees were using the service and were interacting with it at least twice a week over a period of a couple of months. Now there is a backlog of over 200 companies waiting to use the system (we will give more detail in the next newsletter).

We hope this gives you a better idea of how we are thinking about opportunities and building our portfolio in 2014 and more importantly how to approach and what types of companies and teams in which we like to invest.

]]>http://www.beyondvc.com/2014/02/boldstart-ventures-2014-ethos.html/feed0Startups and Intellectual Property (IP)http://www.beyondvc.com/2012/05/startups-and-intellectual-property-ip.html
http://www.beyondvc.com/2012/05/startups-and-intellectual-property-ip.html#commentsWed, 16 May 2012 15:02:04 +0000http://www.beyondvc.com/?p=536Lately questions about Intellectual Property or IP have been cropping up left and right. Eliot Durbin (my partner at BOLDstart Ventures) and I had a long discussion this morning in preparation for his panel today about IP and patents. Last week, we met with a company and when we asked about their core IP, they launched into a 5 minute discussion about the various patents they filed. Do startups really think patents are going to make or break their business? Yes, having core tech or IP matters but patents are a different question altogether. Your best protection is continuing to focus on building your business, your product, and getting market share. So what is my and BOLDstart’s stance on IP and startups.

1. We look at the team and the product and market first

2. We like to think that all of our investments have IP.

3. IP does not mean patent. IP in our mind is your “secret sauce” for doing what you do better, cheaper, and faster than anyone else. Its great if you filed for a patent but that is a long process taking 18-24 months and by the time you get a patent the market opportunity may have already passed you. Focus on building your product and market share, not on patents. That is your best protection and competitive advantage. Waiting for the patent office to tell you that you have a patent is a nice to have, not a must have.

4. Even if you have a patent, it takes tons of time and shitloads of dollars to defend. Trust me, I’ve been there, and it seems to me that the only person making money in these cases are lawyers. In addition when defending patents you will inevitably fight with the big boys with billion dollar balance sheets so that is not a place to spend your time and money.

5. Don’t start a company where there is already a patent battle brewing like email on phones. We are looking for innovations, the next big thing, not yesterday’s way of doing it.

Hopefully that gives you a good perspective on our view on IP, patents, and startups.

]]>http://www.beyondvc.com/2012/05/startups-and-intellectual-property-ip.html/feed8Startups getting caught in No Man’s Landhttp://www.beyondvc.com/2011/09/startups-getting-caught-in-no-mans-land.html
http://www.beyondvc.com/2011/09/startups-getting-caught-in-no-mans-land.html#commentsThu, 29 Sep 2011 14:29:28 +0000http://www.beyondvc.com/?p=489"No Man's Land" is traditionally known as the area between two trenches. This is a reference to World War I and the vicious trench warfare and hand-to-hand combat that characterized that war. In "No Man's Land" lay a wasteland of dead bodies and other debris and shrapnel. Increasingly I am seeing many startups who were ably seed funded get caught in "No Man's Land" between the seed round and a true Series A round led by a venture capitalist.

This is happening because there are way too many companies raising seed capital but not enough executing their way to a Series A. This can happen for many reasons including not raising enough capital in the seed round to begin with and of course not getting your product out the door. So what does an entrepreneur do when caught in this predicament? Many try to do an additional seed round or add-on to the prior round. While not a bad idea, this is rarely successful because many seed funded startups have way too many investors who are more apt to write off the investment then to bridge more seed money. Secondly many angel investors would rather invest in that shiny new car or first seed round then add more capital to a used car or startup that did not "get there" on its first seed financing. Smarter entrepreneurs are increasingly doing two things to make sure they don't caught in "No Man's Land." First, rather than getting 20 great names as seed investors, they are making sure to get at least 3/4 or more of the round invested by a couple institutional seed folks that may have deeper pockets and more ownership in the startup to really care about what happens in the future. Secondly, the smarter entrepreneurs are really thinking carefully about what milestones need to be hit to raise that first Series A round and work backwards to determine how much financing they need to get there. While not an exact science, it is imperative to think like this as you don't want to be one of the many seed-funded companies that will linger in "No Man's Land."

]]>http://www.beyondvc.com/2011/09/startups-getting-caught-in-no-mans-land.html/feed2The New York Startup Market Rocks and is REALhttp://www.beyondvc.com/2011/04/the-new-york-startup-market-rocks-and-is-real.html
http://www.beyondvc.com/2011/04/the-new-york-startup-market-rocks-and-is-real.html#commentsFri, 15 Apr 2011 12:02:43 +0000http://www.beyondvc.com/?p=484OK, I may be biased having been an early stage VC based out of New York since 1996, but I must say that the vibe, energy, and people at the Techstars NYC Demo Day event yesterday was simply awesome. Dave Tisch and team simply did a fantastic job guiding the startups, recruiting the mentors, and organizing the event. I was quite honored to have been a mentor and to have had a chance to interact with so many high quality teams. The audience was awesome as well bringing together many rock stars of the past with those of the future. In addition, over 750 investors came in from all over including London, California, Boston, and DC to network and participate.

Rather than go in-depth on each Techstar company like Alyson Shontell or Ryan Kim already have, I wanted to highlight some overarching thoughts on the NYC market having been an investor here for over 15 years. As mentioned above, what I loved most about yesterday was not only catching up with many new friends, but also many old ones who were an integral part of NYC 1.0. Besides talking about the interesting pivots that many of the Techstars companies took during their 3 month program, many of us simply could not resist talking about how the energy was similar to the mid-90s but why this felt different. In fact, I would liken the 90's Silicon Alley scene as one of discovery but also one where you could argue that the "Emperor had no clothes" meaning that there were lots of great entrepreneurs and startups but no real lasting value created. Look, New York had to start from scratch but 15 years later what makes this different is that we can see a much better result-the same energy combined with real operating and entrepreneurial chops, real succceses and failures, real IPOs and multi-hundred million dollar exits, and a focus on the entrepreneur and product, not on the spreadsheet. So why will this be different this time around:

1. Stronger Ecosystem-accelerators like Techstars, DreamIt, and NYCseedstart have real entrepreneurs and VCs with real experience advising these startups - the pivot and changes from many of these startups from DemoDay was quite impressive and evidence of a stronger ecosystem

2.Real technical experience-what everyone of these startups had in-common was a strong core team of technical founders, rather than business folks outsouring development. And with that, it was clear to see how much these startups could accomplish with so little capital and just sweat equity. These entrepreneurs understand the concept of lean startup and as opposed to entrepreneurs of the past who hailed from big media/ad agencies/big companies, this new generation of startups starts with the tech guys, the way it should be.

3. Financial support system-now you have Angels and VCs who get it. I remember the number 1 complaint in the mid-90s, New York VCs don't get it. They are risk-averse and spend too much time on spreadsheets analyzing the nth detail on a financial model instead of focusing on the talent and product/market. 15 years later, we have many Angels who are former entrepreneurs and many VCs who get it that are in NYC. Add VCs from Boston and CA and elsewhere and you have quite an experienced plethora of investors to work with.

The next inevitable question from this rah rah post will clearly be is this a bubble where yesterday further showed the frothiness of the market? I can't comment on the public markets but what I can tell you is how these Techstars companies raise capital and at what valuations and timeframe will surely provide us with some leading indicators. Hopefully they all get funded but I also hope that these entrepreneurs maintain their confident yet humble approach to building their business the right way and not get too caught up in chasing the highest valuation they can get. All in all, what a great day yesterday and I hope to see many more awesome startups build real businesses out of the New York area. Regardless of what happens, we now have a history of failures and successes which means that we all have more experience to help guide us as we continue to move forward to solidifying NYC as a go-to place for startup activity.

]]>http://www.beyondvc.com/2011/04/the-new-york-startup-market-rocks-and-is-real.html/feed4Reflecting on passed investmentshttp://www.beyondvc.com/2011/04/reflecting-on-passed-investments.html
http://www.beyondvc.com/2011/04/reflecting-on-passed-investments.html#commentsTue, 05 Apr 2011 15:46:22 +0000http://www.beyondvc.com/?p=471Every 3 months I dig through my "passed company" folder to look at what investment opportunities we passed on and why. Inevitably, there are a few companies that are near-misses, but we end up passing on for whatever reason. Did we pass because we didn't think the team was great or because we didn't believe that they could get a product launched? Did we pass because of lack of traction in the beta release or because of concerns on valuation? Looking at my "passed company" folder gives me an opportunity to test our reasons on passing and to see 3 months later if the entrepreneurs could actually execute or prove our concerns wrong.

While many times I find doing this reflection further confirms our reasons for passing, I also find myself from time-to-time sending up a follow up note to check in on these near-misses or doing a quick Google search to see how the company has progressed since our last communication. Inevitably, there will be a few that "got away" and seem to be doing quite well. No one is perfect and looking back every quarter gives me an opportunity to better hone my investing acumen and further refine my understanding on what separates a potential winner from a loser. Many times we are so busy that we can only look forward to the next new thing or next hot deal, but I encourage you to occasionally take a step back, look in the rear-view mirror, and learn from your past history. I promise you that this reflection will only make you a better investor in the long run.

]]>http://www.beyondvc.com/2011/04/reflecting-on-passed-investments.html/feed5Know When to Hold 'em, Know When to Fold 'emhttp://www.beyondvc.com/2011/02/know-when-to-hold-em-know-when-to-fold-em.html
http://www.beyondvc.com/2011/02/know-when-to-hold-em-know-when-to-fold-em.html#commentsMon, 14 Feb 2011 17:10:32 +0000http://www.beyondvc.com/?p=460I had a tough call with an entrepreneur this morning. His company raised a fair amount of seed financing but did not hit the milestones it needed to in order to raise a real round of venture capital. The product is nice but they took too long iterating and releasing a subsequent version while the market around it moved much quicker. In the process, the company ramped up too quickly before it knew exactly what the core value proposition was and to whom. Net net, the entrepreneur was left with a few choices: skinny the company down and try to get to breakeven, look to existing Angel investors for a bridge, shut the company down, or try to sell the business. I am not going to go through each one of the above decision trees in this post, but given the market dynamics today and the overflow of angel funding, I am sure that this is a conversation that many an angel and entrepreneur are having right now. Net net, way too many companies have received angel funding and many of these companies will not raise subsequent rounds of funding.

That is ok as that is how markets work. If you are in this position, all I can say is don't give up but also be honest with yourself and team. Assess your strengths and weaknesses, dive into the market and opportunity, and be as lean as possible to give you as much time to get to where you want to go. If you decide to fight through it and pivot and have the support of your existing investor base then great. Many companies have been successful that way. If you decide it is time to move on and capture whatever value you can for the assets then great as well. Just make sure that you have this conversation with your investors earlier rather than later to ensure you have enough time to execute on the new path. In the end, this process is not unlike what The Gambler from Kenny Rogers song had to go through at the table.

You got to know when to hold `em, know when to fold `em,
Know when to walk away and know when to run.
You never count your money when you`re sittin` at the table.
There`ll be time enough for countin` when the dealin`s done.

]]>http://www.beyondvc.com/2011/02/know-when-to-hold-em-know-when-to-fold-em.html/feed2Put your users first!http://www.beyondvc.com/2011/01/put-your-users-first.html
http://www.beyondvc.com/2011/01/put-your-users-first.html#commentsThu, 13 Jan 2011 13:21:11 +0000http://www.beyondvc.com/?p=456As a VC who invests in seed and first rounds, I love revenue just as much as the next guy. However, the focus on revenue should play second fiddle to a user/customer first experience. Over the years, how many times have we seen companies grow from next to nothing in user base and somehow forget why they got there in the first place? Yes, the answer is because they made an insanely great product or service that catered to their users. Over time they then figured out how to generate revenue without destroying the delicate balance of putting the user first but generating revenue for the business. In an article in the NY Times yesterday, there is a great quote from the MySpace founder, Chris DeWolfe:

“The paradox in business, especially at a public company, is, ‘When do you focus on growth, and when do you focus on money?’ ” said Mr. DeWolfe. “We focused on money and Facebook focused on growing the user base and user experience.”

This a question that we constantly struggled with at Answers.com years ago and now have found to have struck the right balance. I remember some of the management and board meetings where we would all intensely debate whether to add an extra advertisement or not on a certain page and how that would impact the user experience vs the revenue line. While this sounds like minutiae and too much detail, I would argue that if you don't have this debate internally that you may be tilted too far in one direction. In the end user experience won, the page views continued to grow, and consequently revenue improved significantly. Over my 15 years of investing, it is pretty clear to me that the users are in control, keep them happy, and they will come back for more!

]]>http://www.beyondvc.com/2011/01/put-your-users-first.html/feed3Standard investor update for startupshttp://www.beyondvc.com/2010/10/standard-investor-update-for-startups.html
http://www.beyondvc.com/2010/10/standard-investor-update-for-startups.html#commentsWed, 20 Oct 2010 09:41:42 +0000http://localhost/t2wp/2010/10/standard-investor-update-for-startups.htmlI remember when we hired a new CEO for one of our portfolio companies and my tip to him was to overcommunicate. We had a few large VCs on the board and a number of high-profile angels that could also help in various ways. His job was to keep everyone up-to-date but also to know how to get help when he needed it and from whom. Given today's excitement over seed investing it is not uncommon for many of today's entrepreneurs to have 5-15 investors in any given round. How you effectively communicate with your investors is an important priority that if done right will give you major value add while also not taking too much of your time.

In order to help our new CEO, I reached out to all of the other investors, and we all agreed that if we all spoke to him a few days a week about the same information that he would not have time to run his business. In addition, this would be redundant for the CEO since most investors were asking for the same basic information. In the spirit of streamlining information flow, we worked with the CEO to put together a weekly email to provide us with the key metrics the company tracked along with departmental updates on key high priority projects. We weren't asking the company to create something they shouldn't already have (key metrics, departmental priorities, cash balance) but rather we just wanted the data shared on a timely basis. Over time, we all found that when we did speak with the management team that we did not have to spend a half hour gathering information but rather we could get right to the point and actually discuss the whys or hows on certain sales numbers, metrics, or prospects. In the end, we were all much happier and more productive since we had the same baseline of information and could focus our energy on productive and deeper conversation on the business stategy rather than gathering basic data.

Over the last 6 months I have made a number of seed investments and have shared the following company update with them. Each CEO has had their own minor tweak but this should give you a sense of what investors may be looking for and how it can help you streamline your communication and focus on how to extract value from your many investors. If you choose to update weekly then obviously it will most likely be a shorter piece with maybe only the cash burned and current cash on hand as the financials. If you choose to send out a report monthly then it may be more like the form I have uploaded on docstoc.

One other important note I forgot to highlight is that since many companies I invest in are web-based and therefore many of them have real-time metrics I can track. Michael Robertson who started Mp3.com and Gizmo5 (sold to Google Voice) had one of the best real-time dashboards for tracking his business. I could see number of downloads, minutes used, new paying customers, etc. whenever i wanted to by logging into the system. Other companies have created an investor wiki or use status.net (full disclosure-a BOLDstart seed investment) or other communication platforms for investors to share ideas and information. I only imagine this will even get only better in the future.

Anyway, enjoy and I hope to hear some feedback on what is missing or what may be too much information.

]]>http://www.beyondvc.com/2010/10/standard-investor-update-for-startups.html/feed64 Types of CEO Behavior when Dealing with Boardshttp://www.beyondvc.com/2010/04/4-types-of-ceo-behavior-when-dealing-with-boards.html
http://www.beyondvc.com/2010/04/4-types-of-ceo-behavior-when-dealing-with-boards.html#commentsFri, 30 Apr 2010 07:33:10 +0000http://localhost/wp_beyond/?p=9As I have stressed over the years, it is imperative for board members and their management teams to have open dialogue. If you are a CEO, I encourage you to share more rather than less information. One of the best tools that a number of our CEOs use is a weekly email summarizing by department what their goals are and what they have accomplished during the week. In fact, they even share that email internally so everyone in the company knows what is going on. For board members this eliminates redundant questions and allows us to focus on the issues at hand instead of fact gathering. And yes, everything is in there - good or bad. I have written some prior posts on this topic such as "Communicating with Your Board" and the "VC-Entrepreneur Relationship." Along these lines, I would also say that I have observed that CEOs tend to fall into certain patterns of behavior when dealing with their board. To that end, I have attempted to summarize some of these patterns and the pros and or cons related to them.

1. Yes-Man: This is pretty self-explanatory. Whenever the board tells the CEO to go into a certain direction, he/she does. If it means the board telling the team to launch a Facebook or iPhone app just like everyone else, then they do it. Initially for the VC this may seem great but in the long run this can be quite detrimental to the company and value of the business. If the VC/board member is dictating everything from strategy to product features, then what is the CEO and management team doing? At this point, you are running the company and not the entrepreneur. What this means is that it is time to get a new CEO.

2. No-Man: The No-Man is the CEO who gets ultra defensive whenever a board member asks for information or provides thoughts on how to help create more value for the business. He/She always says no at any board suggestion and many times does not even have a good reason for saying so. They say no simply because they don't give a crap about their board and they want to run the show and take zero advice. Saying no is not necessarily a bad thing as many board suggestions may end up having you chase your tail but as a CEO I would encourage you to use some tact when dealing with your board. That is where CEO behavior #4 comes into play. In the end, if a CEO is a No-Man then ultimately the board will replace him/her in the long run because it will be impossible to work with one another due to the hyper-defensive stance taken by the CEO.

3. Yes but No: This is one of the worst behaviors. The Board asks the CEO to research a certain path and the CEO agrees. The Board checks in 2 weeks later and nothing has happened. The CEO consistently tells the Board it will do something but his/her actions are the complete opposite. In fact, this inaction is really a Big F-U to the Board and tells us the CEO has no spine to disagree with the Board and probably does the same with his management team. This kind of behavior is simply unacceptable and ultimately results in dismissal as well.

4. Open-minded: This is the best type of behavior. This type of CEO usually says No immediately when something doesn't make sense and gives reasons why. When he/she agrees with a suggestion, it is duly noted as well. Finally, when this CEO does not understand something, he/she agrees to research further and get back to the board. No our feelings are not hurt if you say no. In fact we will respect you. At the same time, we may have a few nuggets of wisdom to share as well so keeping an open mind is beneficial to all. And if you don't know whether you agree, researching further can only help get a better answer. This behavior is definitely conducive to a strong board relationship and will keep you in the CEO seat longer. Yes, this does not mean that you can execute but this is definitely one measure of the many that board consider in their CEO success profile.

Ok so I outlined 4 CEO behaviors when dealing with boards, only one of which is positive. At the end of the day, the Board-Entrepreneur relationship is a give-and-take one. Both sides have to be willing to express their thoughts (diplomatically) and have an open dialogue. The Board does not know your business better than you and if you disagree, tell us immediately. If you agree, tell us immediately as well. We all don't have time to waste and dancing around a topic does not help anyone get a better result. As an entrepreneur, guide the board as well-tell us where you need/want help. This relationship will have friction at times but don't let it get personal. Friction is good-that is how everyone gets to a better decision point. I hope this helps. Remember the management team is running the business, not the board, and the board is there to help guide you strategically and make sure you don't make the same mistakes we have seen from numerous other companies.

]]>http://www.beyondvc.com/2010/04/4-types-of-ceo-behavior-when-dealing-with-boards.html/feed4Google acquires portfolio company Gizmo5http://www.beyondvc.com/2009/11/google-acquires-portfolio-company-gizmo5.html
http://www.beyondvc.com/2009/11/google-acquires-portfolio-company-gizmo5.html#commentsFri, 13 Nov 2009 10:28:30 +0000http://localhost/wp_beyond/?p=17Congratulations to Michael Robertson and team at Gizmo5 for all of their hard work and perseverance! There is not a lot I can tell you about the future plans for Google Voice, but I do believe it is important to look back to see how we got here. We made our investment in Gizmo5 (aka as sipphone and gizmo project) in early 2006. What Michael and I shared was a vision of openness for the VOIP and IM World. As I wrote on a blog post in January 2006, consumers want what Google and Gizmo5 will hopefully provide in the near future:

At the end of the day consumers don't care about protocols, they just want it all to work seamlessly and easily, and they do not want to be on their own island for communications. What I want is one identity or phone number that works on any IM network, VOIP network, or even integrates with my PSTN and cell phone identity?

Between 2006 we definitely had some ups and downs but through it all two big decisions helped us get here today. First, we drastically cut the burn rate before the nuclear winter and decided to focus on getting to breakeven. Being capital efficient and reliant on viral marketing certainly helped us grow our business and stay lean and mean. Secondly, when Grand Central came out with their single phone number we decided to integrate Gizmo5 into their service. Of course since both Grand Central (now Google Voice) and Gizmo5 were SIP compliant and based on open standards it certainly made that process quite trivial and easy.

Fast forward 3 1/2 years to today, and all I can say is that I look forward to seeing what Google Voice will bring into the future and whether true openness can trump Skype's proprietary protocols. It also seems like the vision of one number for PSTN, VOIP, or cell identity I wrote about long ago will become a reality. One last thanks goes out to Maurice Werdegar and the team at Western Technology Investments (WTI) who provided Gizmo5 with venture debt and worked closely with us in the tough times to restructure our payments. I would work with these guys any time.

]]>http://www.beyondvc.com/2009/11/google-acquires-portfolio-company-gizmo5.html/feed3Occam's Razor and the current state of venturehttp://www.beyondvc.com/2009/06/occams-razor-and-venture.html
http://www.beyondvc.com/2009/06/occams-razor-and-venture.html#commentsTue, 02 Jun 2009 09:41:10 +0000http://localhost/wp_beyond/?p=26I have made many posts in the past about focus and doing more with less, and as I continued on this path it reminded me of Occam's Razor, the idea that the simplest explanation to any problem is the best explanation. Of course Occam's Razor can get more complex but over the years it has been associated with the idea that "less is more." And when I apply this philosophy to the current state of venture, I can see many applications of this theory.

From a VC fund perspective, there has been much discussion about how venture funds have become too large to deliver outsized returns. First with the lack of an IPO market it is much harder to generate $1.5b for investors on a $500mm fund then it is to deliver $300mm on a $100mm fund. Secondly having too large a pool forces VCs to invest much larger amounts of capital into companies pushing up valuations and also exit hurdles for success. Finally, as I have written in the past, I have learned firsthand the problem of giving companies too much money too early. It can lead to a growth at all costs mentality, a lack of focus which means chasing too many opportunities at once, and a lax attitude on how to generate revenue. Enter Occam's Razor as it seems that the new trend is for smaller groups of GPs to form smaller funds to be able to invest in earlier stage companies. With the new operating model of capital efficiency, a little amount of money can go a long way and help VCs generate excellent returns at much lower valuations. Having a smaller fund allows VCs to write smaller checks and take advantage of the current market.

From an entrepreneur's perspective, Occam's Razor can be applied to many different avenues. As we all know, a great entrepreneur must be able to effectively allocate his scarce resources of time and money to fulfill a market need. The longer it takes to develop a product that the market wants means that it will cost more money and that it also opens the door for a competitor to step in before you. If you look at the current Internet and SAAS market, the idea of "release early and release often" certainly fulfills the Occam vision. Rather than spend cycles creating the perfect product with every bell and whistle, many nimble startups have focused on a more reductionist theory of releasing an often simpler product quickly with the idea of getting market feedback for the next iteration.

Occam's Razor also applies to how an entrepreneur should operate his business. Don't pursue too many markets at once, focus on what is delivering the most return for the dollars invested, and hire people and scale your business when you absolutely have a repeatable revenue model. I have been burned like many others by aggressively building out a sales team too early without a repeatable sales model. In addition, from a sales and marketing perspective, we have seen a movement to more of a frictionless sales model where there is less hands-on interaction with customers selling and delivering a product. This would include customers being able to go online and sign up for free trials or download software versus having an expensive direct sales force sell million dollar licenses and one month of professional services to install a product. Finally and most importantly, the idea of less is more certainly applies to raising capital. With the rise of open source software and cloud computing, companies can now get started with less dollars and scale more cheaply and efficiently than before. As all entrepreneurs know, raising less capital means retaining more ownership.

In summary, it is becoming increasingly clear that Occam's Razor and the idea of less is more will continue to spread as the cost of technology continues to decrease, as entrepreneurs get even more efficient in building businesses, and as a non-existent IPO market and the factors above lead more VCs to create smaller more nimble funds to capitalize on the new market realities.

]]>http://www.beyondvc.com/2009/06/occams-razor-and-venture.html/feed1Cover the basics before you raise capitalhttp://www.beyondvc.com/2009/04/cover-the-basics-before-you-raise-capital.html
http://www.beyondvc.com/2009/04/cover-the-basics-before-you-raise-capital.html#commentsThu, 02 Apr 2009 10:54:56 +0000http://localhost/wp_beyond/?p=30No matter how many times I told my friend that he needed to get a deck together for a potential capital raise and model out some thoughts on market sizing and financials, I ran into resistance. It was not because he didn't think it was important or that it mattered. It was because he was understaffed and going 60 miles per hour trying to get a product released. I can understand that pain but at the same time, if you want to raise capital from anyone, you need to have the basics covered.

Fast forward 6 weeks from that last conversation, and we ended up having a meeting with a "friendly" VC to receive some market feedback on where his company stood and what needed to get done to raise capital. And sure enough, it didn't take long for my friend to be questioned on the revenue model, potential market size and opportunity, and how long the cash would last. Of course, he did have some strong answers but they were not what the VC was looking for - it was not quantitative enough. We all know that coming up with market sizing and revenue forecasts for a startup is as accurate as the weatherman predicting the weather. That being said, VCs want to understand the logic behind the numbers as much as the numbers themselves.

Overall the meeting went as I suspected it would - a VC who was very interested in the product but also highlighting the fact that the revenue model was not clear. The kiss of death for me on the revenue side was when the entrepreneur said that he would monetize the company like Facebook and Twitter. Hmmm? We all know that Facebook and Twitter are unbelievable web phenomenons and suck up incredible user attention. And yes I am sure that Twitter will find a way to monetize the stream of data flowing through the system and I am sure that Facebook has tremendous value. That being said accumulating users and worrying about revenue years from now is yesterday's news. Unless you have tremendous scale when you show up at a VC's door, then don't bank on ad revenue as your only revenue source. We have seen the market numbers-overall online ad revenue declining but search revenue increasing. In addition we all know that social apps on the consumer side have incredibly low CPMs and that you need massive numbers to turn into a business. So if you want to get funded, you better have a clear answer on how you will make money and either be implementing that model today or in the short-term. What VCs are looking for is a revenue model today that makes sense - this can include premium subscription revenue, analytic revenue, and even lead generation revenue, but don't ptich massive scale and advertising as your go-to revenue souce 24 months from funding. You will be shown the door quite quickly.

]]>http://www.beyondvc.com/2009/04/cover-the-basics-before-you-raise-capital.html/feed4Positioning and pitch decks for startupshttp://www.beyondvc.com/2009/01/positioning-and-pitch-decks-for-startups.html
http://www.beyondvc.com/2009/01/positioning-and-pitch-decks-for-startups.html#commentsThu, 29 Jan 2009 12:12:06 +0000http://localhost/wp_beyond/?p=36A friend of mine is putting together his first deck for potential investors. In typical startup fashion, they launched a product, got a number of users, and then iterated several times to improve the service. With the product in the hands of tens of thousands of users, they started getting inbound requests from larger organizations who were willing to pay for customized and private group related services. While Version 2.0 will be released to the greater world in the next 6-8 weeks, you may be interested in what I had to say about the pitch deck.

IMHO, a great pitch deck is concise (15 slides) and highly focused. And in the deck I like to see the following points covered (yes, this is my preferred order):

One/Two sentence pitch for company -value proposition (1 slide)

Brief history - founded when, capital raised to date and from whom, capital needed in new round (1 slide)

Who/Team - give me some context of who you are, your backgrounds, success/failures so I can get an idea of your ability to deliver and surround yourself with experienced talent, also include any board members or advisory board members that may be relevant (1 slide)

What's the problem? - too often I see pitches where the entrepreneurs dive right into the product and I scratch my head thinking why in the world we need another lifestreaming service or social network or ad network (1 - 2 slides)

How do you UNIQUELY solve the problem? - solving the problem just like everyone else is not exciting. You need to show how you solve the problem UNIQUELY and ultimately deliver a 5-10x improvement for the customer in terms of ease of use/functionality and cost. What this boils down to is your simple product pitch. (1-2 slides)

Product/Tech - make sure to tell me about your secret sauce or core tech that enables you to deliver a unique service - screen shots, overview, etc - could be good time to go into demo in a live meeting (1-2 slides)

Customer traction - is product in hands of customers? if so, how long in market and share some data on users or beta customers or customers (1-2 slides).

Market size/Competitive Overview - how big is the market and how do you come up with that number - how are you positioned in the market - show graphically maybe by offering or value proposition (this is where you get your typical top right hand corner Gartner like quadrant). A sin is to tell me you have no competition (1 - 2 slides)

GoToMarket Strategy - how will you grow quickly and in a capital efficient manner? How will you sell your product - online, direct, or indirect sales? any potential partners signed or game changing partners that will help you deliver? (1 slide)

Business/Revenue model - show me that the economics of your business work - note that single digit gross margins will get you thrown out the door pretty quickly (1 slide)

Financials - yes I know for early stage customers it is at best a guesstimate but give me an idea of how this will grow, what the revenue numbers look like over the next 3 years to give me an idea of how the business scales, and ultimately it helps me understand the true cash needs for the business to get to breakeven (1 slide)

The financing round - lay out the dollars you are asking for, how it will be used, and how long the cash will last (1 slide)

Milestones-what milestones have you hit so far and what do you plan on realizing during the next year with the new cash (1 slide)

Ok, pretty basic and that's it. For those of you have triskaidekaphobia or fear of the number 13, it's ok as it is a lucky number in our house since my wife was born on the 13th. Anyway, if you cover all of these points the deck should be about 15 pages in length and provide a great overview for potential investors. One other point that I want to highlight is that how you position your business is key. Take a look at this post from April 2004 titled What Aisle, What Shelf. You need to make sure that your audience gets where you fit in the ecosystem quickly and how you are different from what else is out there.

UPDATED: One item I forgot to mention: in this world of constant digital bombardment, you must figure out how your product or service becomes a "must-have" versus a "nice-to-have" solution in a customer's daily life. If you are a "must have" with minimal substitute products then people will clearly pay for what you have. If you are a "nice to have" in a world of many substitute products even though you may get some usage you will never be able to monetize that base.

]]>http://www.beyondvc.com/2009/01/positioning-and-pitch-decks-for-startups.html/feed6Be prudent but don't panic!http://www.beyondvc.com/2008/10/be-prudent-but.html
http://www.beyondvc.com/2008/10/be-prudent-but.html#commentsThu, 09 Oct 2008 10:01:56 +0000http://localhost/wp_beyond/?p=43The alarm bells are ringing in Silicon Valley and start-up land today with Sequoia Capital and Ron Conway telling companies to prepare for the economic meltdown and to raise cash by cutting their burn. This is not new news as being in New York we started to feel the real economic impact in mid-September as Lehman melted down and as Merrill Lynch was bailed out by Bank of America. This is all prescient advice and something I have been espousing to my portfolio companies for awhile - see my last post from mid-September on Doing More with Less, a mantra that all startups should live by. All that being said, it is not time to hit the panic button. Don't go out and fire everyone wholesale and skinny down just because everyone else is. Do it because it is right for your business and because all of your leading indicators tell you to do so. Do it the right way by not making a 20% cut across the board but by thoughtfully thinking about your business, your priorities, and where you need to focus your capital and resources to grow your revenue but conserve cash.

The good news is that many companies I have seen have learned their lessons from the last bubble bursting and rather than subscribe to the "if you build it they will come" model have turned towards the "release early and release often" model of gaining customer traction sooner rather than later and at much lower costs than before. As I look at the current landscape, obvious areas of concern are any companies with high fixed costs and heavily reliant on direct sales whether it be advertising related or enterprise related. It is clear that for these big ticket sales that many corporations are in the mantra of doing nothing rather than doing something and that startups should adjust their budgets accordingly to reflect this reality. For those companies that live by the frictionless sales model and that are capital efficient with a low fixed cost base, take another hard look at your organization and priorities and haircut unneccessary expenses. Once you do all of that and feel that you have 18+months of runway, look on the positive side as there will be many great people on the market. Yes, cash is king and if you have it and conserve it, there will be some phenomenal opportunities to pick up some great talent.

]]>http://www.beyondvc.com/2008/10/be-prudent-but.html/feed0M&A – it ain't over till it's overhttp://www.beyondvc.com/2008/08/ma-it-aint-ov.html
http://www.beyondvc.com/2008/08/ma-it-aint-ov.html#commentsFri, 22 Aug 2008 08:21:34 +0000http://localhost/wp_beyond/?p=48The economy is clearly slowing down and the IPO market is nonexistent. As I have always said, this is the time to hunker down and tweak your business to get your model right. If you are interested in exiting today, M&A continues to be the only viable path along that front. Having been through a number of acquisitions and potential acquisitions through the years, one point I must remind you of is that any deal isn't over until its over. On the surface, this seems so obvious. And yes, once a term sheet is signed and a price and general terms are agreed to, you are in great shape. But recently, through discussions with other VCs and entrepreneurs, I am hearing about more situations where strategic buyers may significantly change the deal terms after more serious due diligence or even potentially walk away from a deal. This can be especially painful if you have spent a number of months meeting with the strategic and going through due diligence in lieu of running your business. Trust me, this happened to one of my portfolio companies last year and reasons cited can include we had a change of strategic priorities and or look at the economy, there is no way we can value you like we did when we started the deal.

While I can offer you no protection from this happening to you, all I can say is to be prepared and skeptical, be willing to walk away, and make sure that you both do enough diligence and meet with the right decision makers before you sign any term sheet and embark on the extended process. Once the term sheet is signed, run like hell to get the deal closed because the longer a deal lingers the more opportunity there is for it not to happen. Keep the hammer down and always have next steps and a defined timetable. In addition, to the extent that the strategic acquirer has made other aquisitions in the past, I would try to leverage your personal network to reach out to some of the VCs or entrepreneurs involved to get a flavor for how the strategic will run their due diligence process and what doozies or surprises the strategic throw at you. Before you start spending your money from the acquisition, remember there is a lot that can change and that probably will change so keep that in the back of your mind as you go through the process.

]]>http://www.beyondvc.com/2008/08/ma-it-aint-ov.html/feed2What do I see in venture through 2010???http://www.beyondvc.com/2008/07/what-do-i-see-i.html
http://www.beyondvc.com/2008/07/what-do-i-see-i.html#commentsThu, 31 Jul 2008 11:50:44 +0000http://localhost/wp_beyond/?p=49The Jordan Edmiston Group recently asked me and a few other VCs a few pointed questions about the future for circulation in their July Client Briefing. As an aside, I worked with JEGI two years ago and they did a fantastic job helping us sell Moreover Technologies to Verisign. They understand the media and online world, are well connected, and work diligently to get the job done. Anyway, here are the questions and my response:

Even though there is uncertainty in the credit markets, a stalled IPO market, and few billion-dollar plus M&A transactions, the investment activity level and appetite for quality businesses in the middle-market continues to be vibrant. Venture Capital firms continue to invest in companies that are providing answers to key disruptive market forces and are exiting those investments via M&A. The Jordan, Edmiston Group, Inc. (JEGI) solicited a handful of key VC executives for their responses to the following questions:

1. What are the key market forces you believe will impact your venture activities through 2010?2. How do you envision capitalizing on or responding to these market forces?3. How is the environment changing for deal exits (e.g., IPO vs. M&A)?

(My answer is pretty consistent with what I have been blogging about during the last few years. Here is an excerpt from the briefing and if you are interested in reading more and some of the other VCs responses, you can get it here)

We are continuing to move to a broadband connected world, where everything that we do on a device increasingly lives in the cloud. Our business applications, our music, our videos, pictures, and messaging will be easily accessible from any device, any time, and anywhere. We will continue to see new cloud-based applications and services, and data-driven services will play a larger role in this new world. There will be some great opportunities to invest in companies that take existing data and run algorithms over these streams of data to deliver better and more targeted advertising, personalized recommendations and search, and better overall services for end-users.

One of the next phases of growth and large revenue opportunities will be driven by what is captured every time you click on a page and move from site to site. How companies use this data to improve a user’s online experience is the next game changer. What I love about these kinds of opportunities is that algorithms scale, have high gross margins, and are highly defensible. With our computing world living in the cloud, there will be a whole new generation of mobile applications that leverage the increased computing power and faster broadband speeds that are offered today.

Mobile carrier voice revenue is declining, and data revenue is the next huge growth area for carriers. However, data revenue cannot increase without applications that drive usage. Obviously, there are concerns about carriers’ “walled gardens”, but I see a future where carriers increasingly provide open access to allow innovative apps to drive data growth. In addition, as mobile devices become better, cheaper and faster, we will see an increase in the number of users accessing the web from their wireless devices, as often as they do from their home PCs.

Capitalizing on Disruptive Market ForcesDawntreader Ventures will capitalize on these disruptions by investing in the entire food chain, from infrastructure layer to the apps and services that touch the end-user. This includes investments in companies like Greenplum, which is powering the back-end data warehousing for a number of high profile Internet companies for targeted advertising; and Peer39, which provides semantic advertising solutions by using natural language processing and machine learning. This technology enables the company to go beyond keywords to understand page meaning and sentiment, to deliver the most effective display and text advertising to end-users.

Exit Strategy

Unfortunately, the market for IPOs is currently “dead”, but it may reopen in 2009. M&A continues to be strong for the right companies that fit a strategic hole in an acquirer’s portfolio. In the end, I continue to tell my portfolio companies that if you focus on what you can control (growing and managing your business), then the external factors (exit strategy) will take care of themselves. However, if you try to force the issue and shop your company, that shows a sign of weakness and more often than not will result in a fire sale. Companies are bought and not sold. For strong, well managed companies, opportunities will always present themselves, as long as you can avoid making desperate decisions.

To read some other VC responses and to get an update on the state of Interactive M&A, I suggest getting the JEGI briefing here.

]]>http://www.beyondvc.com/2008/07/what-do-i-see-i.html/feed4Raising capital and meeting expectationshttp://www.beyondvc.com/2008/05/raising-capital.html
http://www.beyondvc.com/2008/05/raising-capital.html#commentsWed, 28 May 2008 10:27:35 +0000http://localhost/wp_beyond/?p=53What I like to tell portfolio companies is that on average it will take 6 months to raise capital with some cycles being shorter and some being longer. Given that, it is imperative for a company to start thinking about its next round well ahead of time and the milestones it needs to hit to have the right momentum to get potential investors excited. One area that I would like to caution entrepreneurs is being too aggressive on the milestones and revenue forecast, particularly in the near term.

Let me explain. Like any other VC, I love to invest in companies going after big markets with huge revenue potential. That being said, I also like to see plans grounded in reality as well. Rather than get me excited, showing a revenue ramp from $1mm to $17mm to $65mm will actually do the opposite for me, raising more questions and concerns than general excitement. Along those lines, it is also imperative that when you share your plans with investors that you are pretty confident that you will realize your milestones or hit your numbers in the next 6 months as investors like to see if you can deliver on your promises. One cardinal sin is being overly optimistic in the near term and falling flat on your face in the due diligence process. It is much better to position yourself in a way that you can meet and exceed expectations during the due diligence process than the other way around. When this happens the rest of your forecasts become more believable.

]]>http://www.beyondvc.com/2008/05/raising-capital.html/feed5Top tech M&A advisors for 2007http://www.beyondvc.com/2008/02/top-tech-ma-adv.html
http://www.beyondvc.com/2008/02/top-tech-ma-adv.html#commentsFri, 08 Feb 2008 09:41:37 +0000http://localhost/wp_beyond/?p=67I just got the 451 Group's summary on the top M&A bankers for 2007. As with 2006, Goldman Sachs was #1 on the list. Take a look:

Top five overall advisers, 2007

Adviser

Deal value

Deal volume

2006 ranking

Goldman Sachs

$79bn

43

1

Credit Suisse

$75bn

29

3

Morgan Stanley

$74bn

29

6

Citigroup

$61bn

23

5

Lehman Brothers

$56bn

21

4

Of course if you break down the numbers, you can see that the average deal size for all of these banks range from $1.75 to 2.75 billion. Let me translate back for the startup community. As I have written before, I am a firm believer that companies are bought, and not sold (see an earlier post). In other words, I am not a fan of hiring a banker to shop a company around but rather find it better when a portfolio company receives an unsolicited offer and you then bring a banker in to leverage that bid to create a more competitive situation. Assuming you are in this position, every startup I know says, "Let's go get Goldman or Morgan Stanley." While in theory we would all love to have these guys as advisors, the chances are that you are not going to get them on board. First, they typically have high minimum thresholds of exit value typically in the $300mm plus range and secondly even if you fit that criteria you may not get all of the attention you need since a $5 or $10 billion dollar will clearly trump yours. What I would advise is that you find a banker that has the recent experience selling companies in a price range that you are seeking, will give you the PERSONAL attention that you need to make the transaction successful, and has the network to reach out to the right people on a timely basis. Based on my experience, I have found that some of the firms like Thomas Weisel Partners and Jefferies Broadview who are not bulge bracket but with strong reputations in the technology markets can be a good fit. I am sure there are many other great firms that I am missing but you get the idea.

]]>http://www.beyondvc.com/2008/02/top-tech-ma-adv.html/feed1Greenplum closes on $27million round of financinghttp://www.beyondvc.com/2008/01/greenplum-close.html
http://www.beyondvc.com/2008/01/greenplum-close.html#commentsTue, 22 Jan 2008 11:11:22 +0000http://localhost/wp_beyond/?p=71Congratulations to Bill, Scott and team on our new $27mm round of funding led by Meritech and including Sun Microsystems and SAP Ventures. You guys have been pushing the envelope since I have known you and delivering some spectacular results to boot. It is nice to see our team and product get validated with a significant round of funding so we can continue our battle to bring our customers a better, faster, and cheaper way to access and analyze massive volumes of data. When we made our first investment years ago, our fundamental bet was that a new approach was needed to deal with exponential data growth driven by network computing and internet applications. We certainly had some fits and starts tackling this data problem by utilizing a software-only approach built on top of open source software and delivered on commodity machines, but with this funding and our continued customer momentum, we are certainly on the right track. For more on this investment, read the following quotes from Jonathan Schwartz, CEO of Sun Microsystems, and Nina Markovic, head of SAP Ventures:

"Alongside Sun's acquisition of MySQL, our investment in Greenplum is further evidence of our commitment to the open source database community and marketplace," said Jonathan Schwartz, CEO and president, Sun Microsystems. "Postgres has been a critical part of our support offering to customers, and Greenplum's leverage of Postgres to disrupt the proprietary vendors with breakthrough business intelligence solutions creates opportunity for their investors, and more importantly, our mutual customers."

"We invested in Greenplum because we're seeing a growing demand for scalable database technologies to support analytical and data-driven applications," said Nino Marakovic, head of SAP Ventures. "From a technology perspective, the Greenplum database is very strong and complementary to our offerings. We share the vision of enterprises harnessing ever-growing data repositories to make optimal business decisions in real time."

]]>http://www.beyondvc.com/2008/01/greenplum-close.html/feed0Should I flip or should I build?http://www.beyondvc.com/2007/10/should-i-flip-o.html
http://www.beyondvc.com/2007/10/should-i-flip-o.html#commentsThu, 11 Oct 2007 14:51:44 +0000http://localhost/wp_beyond/?p=86It seems that everyday there is a new annoucement of a tiny startup being bought by a large company. Two days ago it was Jaiku being bought by Google and this morning CBS announced that it is buying Dotspotter, a 10 month old gossip blog. Put yourself in these entrepreneurs' shoes - you launch a great product or service today, usage is growing, revenue is nil or minimal, and cocktail party chatter and buzz are at its highest. You then have the opportunity to sell today at a pretty good number but you forego your chance of building that huge business. What do you do and how should you think about it? As i started thinking deeper about this question, I was reminded of the old Gartner Hype Cycle chart. If we use this as a backdrop, perhaps I could show a framework from which to think about this important decison.

According to Gartner, "A Hype Cycle is a graphical representation of the maturity, adoption and business application of specific technologies." Similarly, I have graphically represented the choices an entrepreneur has to make in the continuing saga of build or flip. Let's call this the "BeyondVC Startup Cycle." According to Gartner, there are 5 phases in a Hype Cycle (my comments in parentheses): Technology Trigger (product launch), Peak of Inflated Expectations (height of buzz), Trough of Disillusionment (this is harder than I thought), Slope of Enlightenment (the broad market is finally ready), and Plateau of Productivity (better have my next product ready). I believe the descriptions speak for themselves as what usually happens with the adoption of new technology is that the hype builds quickly but it actually takes a lot longer to reach critical mass. Similarly, one can superimpose a startup lifecycle on the graph. If you look at the build or flip question in this context, it is obvious that an easier, less risky choice to make is best done at the Peak of Inflated Expectations or height of the cocktail circuit chatter. Usually at this point in time, an entrepreneur can maximize short-term value as acquirers will buy more on vision and technology than on business fundamentals. If you decide to build for the long haul and go for the home run, it will take you a fair amount of effort and time to create the same value that acquirers will pay today at the buzz cycle as they will expect more mature companies to have more established products or services and more milestones hit. Companies that sell at the early stages should understand that while they may forego going big, if they do not sell today for strategic value then they would have to live up to their hype and be bought in the future for real revenue. In other words, as companies mature the valuation of a startup turns from pure strategic value to one where it is based more on actual revenue multiples and market comparable data.

At this inflection point, an entrepreneur needs to think about whether they want to and can build for the long haul (taking into account the risk and time to do so) or sell today (net present value of your potential expected outcomes in the future). This is the point where you have built a nice service or product, gotten a number of users, but have not really monetized it or created a scalable business model that can drive profits. Can you really build a company or is this just a feature for a bigger player? If you choose to go for it and raise VC funding, you have to really believe that the capital you raise will help you create a much larger pie in the end. Do you want a larger percentage of a smaller pie or a smaller percentage of a much larger one? Once you take in the money, it requires a ton of hard work to build a team, continue to innovate, and refine your business model. There are no guarantees and given the amount of time and energy you expend you could just as easily go out of business after 5 years of effort. One other factor for entrepreneurs to look at is the opportunity cost or the time you spend on one venture.

Since I never like to make decisions in a vacuum, if I had an offer, I would test the market to get a read from VCs to see what their interest level is in funding my business and also poke around and speak to a couple of other strategics to see if I could extract more value. In the end, these valuable data points will help you make a more confident decision - if no VCs bite, then it is an easy decision for you. If some VCs have an interest, try to understand how much capital and at what price they would be willing to invest. If you really believe in your business then you should either take the money from the VC or get a significant premium from the strategic investor to sell today versus building your business for the longer term.

At the end of the day, it comes down to two things. First, what is your appetite for calculated risk - in finance there is a direct correlation to risk and reward. If you want the big payday, you are not going to get it investing in risk-free bonds. Secondly, it comes down to your passion. Building a company is about more than just the money as money can be fleeting - remember the bubble, it sent a lot of carpetbaggers home. The ones who have made the big payday have focused on a broader and bigger goal, building an insanely great product or service for their customers and keeping them incredibly happy. As you do the right thing for your customers, you will do right for your investors, your employees, and ultimately yourself.

]]>http://www.beyondvc.com/2007/10/should-i-flip-o.html/feed6On performance based earnoutshttp://www.beyondvc.com/2007/10/on-performance.html
http://www.beyondvc.com/2007/10/on-performance.html#commentsMon, 01 Oct 2007 13:47:57 +0000http://localhost/wp_beyond/?p=87I am sure you remember the ebay-Skype deal where ebay coughed up $2.6b upfront for Skype and offered an earnout of up to another $1.7b for hitting performance numbers. Besides the value of the deal, what struck me most was that 40% of the total potential deal size was based on performance-based milestones. Fast forward 2 years later and in the day of reckoning it seems that eBay is only going to pay $530mm of the $1.7bb earnout (see Eric Savitz from Barrons post and press release). I am not going to comment here on whether or not the Skype deal was a complete failure for eBay, but rather I thought I would more importantly share my thoughts on earnouts in M&A transactions.

Quite simply, be wary of performance based earnouts unless you get significant value upfront. Many times an acquiring company may say that they can't pay higher than a certain value for your business but if you perform they can pay alot more. In other words, they want you to put your skin on the line and also incent you to stick around. That is fine as long as you get more than enough upfront for your business so that any dollar from earnouts is just pure upside. If you feel that you are not selling for enough and that too much is tied in the earnout, then trust your gut and either rework the deal or walk away.

Earnouts in theory sound great - the better you perform the more you get. However in practice it doesn't always work out well. First, earnouts could potentially put the acquiring and target company at odds by creating potential perverse incentives for the acquiring company. Hmm, the company I just bought is doing great but I don't really want them to hit it out of the park just yet so I may delay giving them their marketing dollars? You can obviously think of a bunch more examples on this front. More importantly, though, I feel that unlike a startup, you have relatively little control of your own destiny. In any M&A with performance numbers, the acquiring company will say it is offering all of these resources and distribution and therefore the revenue, profit, and customer targets should be quite high yet attainable. In a startup, if you fail it is your fault. As part of an operating business or larger entity that isn't always the case as you are most likely dependent on the acquiring company for resources, distribution, and cash to grow and deliver on your promises. Big companies move slow and you are more likely to not get the support you need in a timely manner meaning that realizing your earnout becomes a very tough proposition. Even thinking about the ebay-Skype saga, I can remember reading the countless news items and stories about how the 2 cultures clashed, how ebay did not understand the Skype business, and the management changes and reorgs that took place. All that being said, I am sure the investors are bummed about leaving another $1.2b on the table in earnouts but at the same time they are still ecstatic about the initial $2.6b they received upfront.

]]>http://www.beyondvc.com/2007/10/on-performance.html/feed7Learning lessons from Amp'd Mobilehttp://www.beyondvc.com/2007/07/learning-lesson.html
http://www.beyondvc.com/2007/07/learning-lesson.html#commentsTue, 31 Jul 2007 10:56:46 +0000http://localhost/wp_beyond/?p=101I am not here to pile on the Amp'd Mobile situation, but I find it is always important to learn as much as you can from your mistakes and from other people's mistakes. Rafat Ali has a great interview with Peter Adderton, the former CEO of Amp'd Mobile. Here are a couple of interesting points that Peter says helped to ultimately bring the company down:

-- You don’t raise $400 million in 18 months by spending time inside the office. Trying to ambiguously raise that amount of money, while at the same time trying to create something new and different was a challenge that caught up with us in time. -- On the financing, we were learning as we went along. With the amount of cash that we required, it probably made more sense to go with one or two big pockets than a lot of smaller pockets. -- The biggest struggle I had [with the board] was agreement on where the company should go. We had way too many board members and then we had observers at top, and the any partner could dial in, to a point where it became very difficult for the management to manage.

Rather than dive into some of the operational or economic lessons like how a company that raises $400mm can't get to profitability, I thought I would focus more on the financing side that Peter discussed with Rafat. In short, some of the lessons learned from Peter include having too many investors and too many board members. One VC once told me that having a great board did not guarantee success but having a bad board can almost certainly guarantee failure. Speaking from personal experience, it is pretty easy to see how differences in strategic direction and plans combined with egos can get in the way of real productivity. The more people you add to the mix and the more complicated and time consuming it can get. In fact, I remember spending at least 3/4 of my time on one of the weak boards dealing with bickering between other board members instead of spending my time helping management and focusing on the important issues. The CEO also had to spend just as much time massaging egos and different incentives to keep driving the company forward. At times, It was close to impossible for the board to come to agreement on a budget, hiring plans, and strategy and ultimately the company missed many opportunities. I can only imagine what Amp'd board meetings were like when you mix in a number of VCs, hedge funds, and strategics, all of whom invested in different rounds at different prices and with different preferences. So one of the lessons to be learned is to choose your partners wisely and less is more. Rather than try to spread out ownership of your business with lots of investors so one or two don't have too much control, you are better off looking for a couple of investment partners who share the same vision of the business and who you believe will act rational through both good and bad times. This is where references can help tremendously.

One other point, every second you spend fundraising is another second you are not running your business. Companies have to be well prepared and go through a number of meetings to raise $5mm let alone $400mm in 18 months. It is not hard to see how the CEO and management can get distracted and not spend enough time on operational issues when they are constantly raising capital. And of course, the more money you raise, the bigger the exit you need to get investors their 8-10x. I am not saying this happened in the Amp'd situation, but when capital is abundant and the pressure to create significant returns exist, it can force companies to try to get big fast and try to spend their way to success instead of finding the right mix of organic and inorganic growth. That is why I have always loved capital efficient business models.

]]>http://www.beyondvc.com/2007/07/learning-lesson.html/feed2Are all of the venture returns in B2B?http://www.beyondvc.com/2007/07/are-all-of-the.html
http://www.beyondvc.com/2007/07/are-all-of-the.html#commentsMon, 16 Jul 2007 14:18:04 +0000http://localhost/wp_beyond/?p=104The Wall Street Journal has an interesting article today about how the resurgence of tech IPOs have really come from "less glamorous, business-focused companies selling such products as telecommunications equipment and computer storage." In fact many of these companies have market caps > than $1b each. The article is right in that alot of buzz gets centered on consumer Internet companies like Google or YouTube and that on absolute market capitalization many of the big returns are found in the B2B type deals. However, I do disagree with the notion that because some of these "consumer web firms are selling themselves to larger Internet companies such as Google or Microsoft Corp. for a few hundred million dollars or less" means that returns for investors can be mediocre. In fact, what the article fails to look at is how much money some of these infrastructure companies have raised in order to get public. Obviously if a VC is looking for 10x type multiples on their invested capital, the more money raised means the higher ultimate market cap a company needs to achieve. Taking this a step further, let's look at the amount of capital raised by some of the more recent IPOs:

Based on this data, one can see how many of the existing investors generated some great returns on absolute and relative terms. So while there have been very few Internet companies worth $1b or more on absolute terms, one must look at the capital efficiency of these businesses to understand why companies that raised $20mm or less can still sell in the $200-400mm range and still create tremendous returns for their investors. At this level of funding the risk/reward balance is just much different than in a traditional infrastructure play. Sure many of these Internet companies being financed may not be standalone IPO candidates but that doesn't mean that companies that generate 10-20x for their investors are bad investments either. However what is beginning to scare me is that valuations for these consumer internet plays are continuing to creep higher. In addition, many of these "capital-efficient" companies are raising bigger rounds of capital meaning the bar for exiting is getting higher and higher. If these two factors continue to increase over the next couple of years, this could lead to disappointment for many VCs in the long run.

]]>http://www.beyondvc.com/2007/07/are-all-of-the.html/feed0Don't forget to look at venture debt when raising a new roundhttp://www.beyondvc.com/2007/06/dont_forget_to_.html
http://www.beyondvc.com/2007/06/dont_forget_to_.html#commentsMon, 11 Jun 2007 14:08:51 +0000http://localhost/wp_beyond/?p=107We all know the story - it is incredibly cheaper to start a web-based business versus 5 years ago with the rise of open source software and commodity servers. However, while getting started with thousands of users is cheap, scaling to significant numbers will require some dollars. The good news for you and for venture investors is that your buck can go alot further today versus yesterday not only because of the commoditization of infrastructure but also because the venture debt market is alive and kicking. In the last six months, we have augmented some of our existing venture financing with venture debt as the market has become quite competitive which means pricing and terms are getting more attractive for all of us. In addition, while most associate venture debt with investments in companies with core technology, more and more venture debt firms are back and willing to offer capital to earlier stage web-based companies with no financial covenants and MAC (material adverse change) clauses. Of course the more flexibility you have with respect to uses of cash means that pricing will go up. All I can say is when evaluating your company's cash needs and potential runway, looking at the venture debt market is not a bad idea.

There is also another market metric that is driving a renewed interest in web-based companies for these lenders- they are getting funded by VCs (venture debt lenders mostly like to do deals with strong financial sponsors which increases their likelihood of getting paid back) and these startups are better able to manage their burn rates reducing risk and offering lots of upside. Sure, while some of these venture debt firms recognize that web-based businesses may not have as much hard and true intellectual property, the fact that they are more capital efficient and can scale more rapidly means they can also generate pretty nice returns from the warrant portion of their deal. Getting in earlier also allows these venture debt firms to buy more of the company from a warrant perspective than getting in on later rounds. The trick for entrepreneurs is to look at bringing on debt concurrent or soon after your close of equity financing.

Why can raising venture debt be great? It is quite simple - the dollars are relatively cheap compared to an equity financing and extending your runway to hit more critical milestones means a potentially better valuation for your company down the road. And of course if you exit before raising another round, there are more dollars available for the equity holders. A typical structure for an early stage deal could be an equity raise of $3-5mm with another $1-2.5mm of debt. From a pricing and terms perspective, you should look for capital which is flexible in terms of use for true growth capital (growing your business) with no financial covenants or MAC (material adverse change clauses) which can put more risk into the debt equation. Of course, the more flexibility you have, the higher the interest rate will be relative to other types of loans. Most venture debt deals will have an interest only portion for a short period of time before amortization (monthly payments of principal and interest kick in). Typically you will see terms of 30-36 months where your lender will get paid his full portion of the loan and interest by that time frame. In addition, lenders will ask for warrants equal to a percentage of the dollar amount raised (for example, depending on the deal, a 5% coverage for $1mm could be equal to $50k of equity to be purchased at the current share price).

All is not rosy as there are some potential and hazardous downsides to this model. If you burn through your cash and can't make the monthly principal and interest payments, your lender can take over your company as their debt is usually secured against your company and intellectual property. Trust me, a number of companies got burned with this during the Internet boom when their businesses were based on wildly inflated revenue projections and unilimited capital resources. Just when you needed another month or two to sign that strategic deal, the venture debt guys would come in and pull the rug from under you. Granted it is not that bad as your lenders are your partners and will negotiate with you, but at the end of the day, if they see their ability to get paid in significant jeopardy, they will do what they have to do to recoup as much value as possible. For some investors and entrepreneurs, this risk may not be worth the dollars. For others who are confident in their execution and ability to raise another round, there is no better way to stretch your dollars in the company and create more value with minimal dilution. So the next time you hear the word "debt," don't be scared and keep an open mind as you may be able to stretch your resources further and achieve some additional critical milestones driving increased value in your business. The interest in web-based businesses is there and the competitive market means that pricing and terms are pretty attractive now.

]]>http://www.beyondvc.com/2007/06/dont_forget_to_.html/feed6Microsoft VC Summit 2007http://www.beyondvc.com/2007/03/microsoft_vc_su.html
http://www.beyondvc.com/2007/03/microsoft_vc_su.html#commentsMon, 19 Mar 2007 10:59:28 +0000http://localhost/wp_beyond/?p=121The day after Microsoft's TellMe aquisition, I was at Microsoft's eighth annual VC Summit. Unfortunately, I missed Steve Ballmer's opening discussion, which in my opinion, is always one of the most entertaining and informative sessions of the event. For the last few years, Steve spoke at the end of the event but for some reason they switched it on us and had him at the beginning. Anyway, I am waiting for some other bloggers to summarize his discussion. Notice the picture I link to from Paul Jozefak's blog titled "Expanding Platform to the Cloud." I must say that I came away quite impressed by Microsoft's progress in its cloud and Windows Live strategy. Last year, all of the Windows Live talk seemed quite rushed, disjointed and forced and seemed it was more of a response to the market saying that Microsoft did not get the SAAS thing. This year the strategy seemed much clearer and well defined and the executives knew how the Internet and cloud fit into all of the various business units. In the end, Microsoft has made some huge strides and will certainly be worth watching over the next year. In addition, as with each year, I did find the Microsoft executives more willing than ever to network with startups to fill gaps in their product line and to be a more open, gentler Microsoft versus years ago. There is nothing like real competition to get a company to change its mindset. Sure, they didn't tell us much in the public sessions as sometimes you can come away with the impression that Microsoft is doing everything and the only opportunities for startups are niche verticals built on Microsoft's platform. But truth be told, if you actually did get a chance to spend some one-on-one time with the executives, you will find a much different story. Reflecting on that point, Microsoft made a little over 20 acquisitions last year and plans on doing a similar amount this year. One sure way to not get any partnership done is openly ask the Microsoft executives, "How do I get my portfolio company acquired?" The real point is to find and network with the key executives at the summit and figure out how the individual business unit's process works on a partnership discussion and get that started.

The consumer mobile breakout session was one of the more informative discussions that I attended. Basically as the world moves to three dominant operating systems for wireless (Symbian, Windows Mobile, and Linux), Microsoft will look to increase its penetration by leveraging an extensive development platform to allow third party partners to develop new consumer services which can be easily deployed via its worldwide carrier partners. Naturally, one of the questions asked was if these apps only worked on Windows Mobile or across the various operating systems. As you might suspect, these apps would likely work better on the Windows Mobile platform, but the Microsoft folks did stress that it does and has to work with other competing operating systems as well. The gaps that Microsoft was looking to fill through partnerships or acquisition were, broadly speaking: games/entertainment, location aware services, TV/video (although the one Microsoft executive acknowledged it was overhyped), ad management, mobile content mgmt, and billing and payments. One of the value propositions offered by the Microsoft mobile folks was key relationships with carriers across the world.

Another engaging talk was Peter Moore's (Corporate VP, Interactive Entertainment Business) presentation on Microsoft's move into the digital home with its Xbox360. Of course, after a long day, seeing a commercial for the yet-to-be-released Halo 3 was quite energetic and refreshing. Interestingly enough, it is quite amazing to see that as these gaming machines get more powerful, the games themselves end up being the commercial (think about The Gears of War commercial on television). Despite the fact that Peter could have spent hours demoing games, his presentation centered around the full featured entertainment capabilities of the device which included the ability to synch with other PCs in the home and buy movies, television shows, and music in a simple way. Once again, it is amazing how much progress is being made throughout the many divisions at Microsoft and how the Internet and on-demand services are getting weaved into the very fabric of the applications and infrastructure. For a large company, one year has made a huge difference. Finally, one of the other recurring themes I heard throughout the day was the importance of advertising in many of its product lines ranging from mobile to MSN to the digital home and video gaming. If there are other acquisitions to be done, I am sure that some interesting advertising related technology and services will be on their radar screen.

Just to be clear, this is not in any way, shape or form a Microsoft love-fest. I am just pointing out that while so many people are counting them out that they have lots of cash, renewed energy, and a long-term view towards winning in their markets.

]]>http://www.beyondvc.com/2007/03/microsoft_vc_su.html/feed4The similarities between venture capitalists and social workershttp://www.beyondvc.com/2006/12/the_similaritie.html
http://www.beyondvc.com/2006/12/the_similaritie.html#commentsWed, 20 Dec 2006 14:13:44 +0000http://localhost/wp_beyond/?p=143I had an interesting call this morning with an entrepreneur who had been up until the wee hours of the morning reviewing legal documents for a big strategic partnership. He apologized about his state of mind which wasn't exactly calm and cool, and we proceeded to discuss the issues and parse out the major ones from the minor details. As I reminded him of a conversation I had with my wife several years ago, we all had a good laugh. When my wife and I first met, she asked me what a venture capitalist does. Sure, there was the usual answer of we look for great people building great companies, invest in them, and help them through strategic discussions and introductions. However, there was a subtler more nuanced answer in that a big part of being a venture capitalist was similar to being a social worker. Our business is a people business and part of that means not only knowing who we are dealing with but also understanding what makes them tick and helping them through both the good and tough times. We are part coach, part mentor, and part social worker. We need to understand the psychological state of the entrepreneurs we work with and the management teams they build. When an entrepreneur is on the ledge, looking down, and ready to jump, our job as a VC is to pull them off and help calm them down. When an entrepreneur is too cocky or overconfident, we show them the ledge, have them look down, and then pull them off. So in many ways, being a good venture capitalist is dependent on our ability to understand what drives the people we work with, how to constantly challenge them and motivate them, pat them on the back when they need it, and push them harder if they are slowing down. For that matter, these are some of the more nuanced and subtle traits that entrepreneurs need to exhibit when dealing with their employees, constantly taking the pulse of the company and key individuals, and massaging the various personalities and egos to help them stay hungry and excited to perform at their best. As much as some would like to think that being a VC is about the technology or numbers, it is all about the people. Anyway, at the end of the call my colleague and I were able to walk our CEO off the ledge and help get him prepared for his next battle. He never thought of us as also playing the role of social worker in our frequent interactions, but he certainly agreed as he thought more about it.

UPDATE-there are lots of different types of social workers but in this context think counselor or sounding board. My comparison with social workers was not meant to make all entrepreneurs sound like they have serious issues-the point is that sometimes the daily bump and grind of operating a business can get to you and having a VC who knows your business and who is part counselor/part sounding board can be an invaluable resource.

]]>http://www.beyondvc.com/2006/12/the_similaritie.html/feed5Podcast with Heather Green of Businessweekhttp://www.beyondvc.com/2006/09/podcast_with_he.html
http://www.beyondvc.com/2006/09/podcast_with_he.html#commentsThu, 14 Sep 2006 11:41:02 +0000http://localhost/wp_beyond/?p=177I recently had the opportunity to do a podcast with Heather Green of BusinessWeek and Blogspotting. If you have a desire to hear about some of the areas I find interesting and to learn about pitfalls to avoid for startups, I suggest that you download the show. My only regret is that we did not get to use Gizmo Project, one of my portfolio companies, to do the podcast. After all, isn't important for VCs and entrepreneurs to eat their own dog food?]]>http://www.beyondvc.com/2006/09/podcast_with_he.html/feed0Add Startup Review to your blogrollhttp://www.beyondvc.com/2006/09/add_startup_rev.html
http://www.beyondvc.com/2006/09/add_startup_rev.html#commentsWed, 13 Sep 2006 15:16:05 +0000http://localhost/wp_beyond/?p=178Nisan Gabbay of Sierra Ventures recently contacted me with respect to his new blog, Startup Review. According to Nisan:

Startup Review will be a blog that profiles successful Internet start-ups in a case study format. The case studies will analyze the key factors that made the companies successful, with an emphasis on strategy and product decisions. Each case study will also have sections discussing launch strategy, exit analysis, and links to other good analysis on the company.

I don’t think that there is a good forum where people can discuss what made certain companies successful, particularly the less publicized success stories. Sure there are whole books written on companies like Google and eBay, but what about the more modest success stories in the $10M - $2B range? My goal is to highlight lessons learned from companies like Rent.com, HotorNot.com, or Greenfield Online.

I took a look at his site and he has some great posts on companies like MySpace. If you are interested in going more in-depth to understand how certain companies got off the ground and made it, I suggest subscribing to his site. As for my two cents, it would also be interesting for Nisan to dive deeper into some more high profile failures in the market so others can understand the many things that can go wrong in a business. I have found that digging into your failures and doing a post mortem on why your company lost a sale or a customer, partner, or employee can be more illuminating than just understanding why you succeed.

]]>http://www.beyondvc.com/2006/09/add_startup_rev.html/feed3Platform Wars, battle for startup mindsharehttp://www.beyondvc.com/2006/05/sap_enters_plat.html
http://www.beyondvc.com/2006/05/sap_enters_plat.html#commentsFri, 19 May 2006 09:22:00 +0000http://localhost/wp_beyond/?p=203Have we been through this discussion before? Remember the eWeek article from last year titled "Is .Net failing to draw VC loyalty?" and the corresponding discussion in the blogosphere, including my post? Well, it seems that SAP is taking a page out of the old Java venture fund camp to seed companies and help them build on a Netweaver platform. As I mentioned before, I do not fund a company based on what platform they build on but if they choose one that is not open source then there better be a go-to-market reason for it. Being at the Microsoft Summit last week, I kept asking myself why one of my portfolio companies would want to deploy its software on a Microsoft Sofware as a Service platform if it could do the same thing using open source technology and not have to pay additional license fees? It comes down to tradeoffs. If there is a clear path to customer opportunities and market adoption then it may very well be worth it to lock yourself into one vendors's technology platform even though a majority of the customer dollars may not go to you. From a VC perspective, I want to reiterate to not focus on what platform you have built on but on what customer problem you are solving, what market you are going after, and how you plan on ramping up your customer base. If the opportunity is large enough (the problem is that many specific .Net-based or Netweaver-based companies are nice businesses but pretty nichey) and the market you are going after maps well with one of the big platform vendors, then it may make sense to align your company closely with theirs. In the case of SAP and Netweaver it will be interesting to see how the market reacts to their investment plans. Clearly, having big exits will spur some entrepreneurs to make a bet with Netweaver. Sap's Virsa and Frictionless Commerce acquisitions are steps in the right direction to get everyone's attention.

I look forward to hearing more about this topic from Jeff Nolan (we are grabbing dinner Monday night) as he is blogging from Sapphire now.

Update: this discussion is enterprise focused, not a consumer one

]]>http://www.beyondvc.com/2006/05/sap_enters_plat.html/feed1Microsoft VC Summithttp://www.beyondvc.com/2006/05/microsoft_vc_su-2.html
http://www.beyondvc.com/2006/05/microsoft_vc_su-2.html#commentsFri, 12 May 2006 23:21:00 +0000http://localhost/wp_beyond/?p=204I had the opportunity to attend my third Microsoft VC Summit in California on Thursday. It was a great opportunity for VCs to network with Microsoft's top executives. This year's focus was on Unified Communications, Saas, and Windows Live (includes MSN). While I won't go into excruciating detail on the sessions, one of the highlights wass having Steve Ballmer give a frank discussion on how VCs and startups can work with Microsoft. He made it very clear that the pace of acquisitions has increased, rising from 9 the prior year to 22 this past year. And of course, his Corp Dev team has told Steve that they have the biggest pipeline of deals they have seen in years. For those who care, the sweet spot for Microsoft is to buy a more engineering and technology focused company versus a sales and marketing oriented one. In terms of price, I thought I heard acquisitions in the $50mm - 200mm range but Don Dodge of Microsoft (I suggest reading his post on the acquisitions) seemed to hear differently. Anyway, the point is that there will be plenty of opportunities for VC-backed companies and startups to find a home in Microsoft. Interestingly enough, of the 22 companies that were bought this past year 1/3 of them were not venture-backed. This was surprising to Steve and also may be indicative of how many of the tech players have been snapping up interesting engineering teams and products before they really get to market.

One of the interesting questions posed by a VC was how Microsoft valued technology and engineering assets versus companies with lots of customers and revenues. In short, Steve had a simple answer in that Microsoft knows how much a technology asset or new product is worth to Microsoft and then they can compare that to what the value would be using more traditional financial metrics. In the end, Steve rightly said that it comes down to a negotiation since revenue ratios, etc. really do not apply to a bunch of engineers and it comes down to what the VC needs in terms of multiples and what the founders need to get the deal done. I suggest keeping an eye out for Microsoft as it feels like they may even do more than the 22 acquisitions they did this past year. As far as opportunities and trends are concerned, Steve pointed out the usual suspects:

Consumer market drives enterprise expectations

Open source - more pragmatism coming to the market, not just a religion but needs to deliver real value

SaaS - it works, it will grow, but there are still some opportunities like no higher level platform in the cloud - for example, how do you make presence work from site to site

Office 2007 - biggest area of innovation for Microsoft, think of Office as a client to all data, front end to SAP as an example. Also will include Office Communicator in Office 2007 with Word, Excel, etc. highlighting how important communications and collaboration will be. Btw, Office Communicator is SIP-based.

Mobility - Steve believes the hype was higher a couple years ago and that the reality is bigger today as we have smarter more intelligent devices at cheaper prices running over faster networks. There will be a need for software to help intelligent devices in the cloud to talk to each other.

I have to admit I was pretty impressed by the openness of the Microsoft executives and the sheer amount of new technology they will be bringing to market in 2007. My favorite technology which I saw in action was Windows Presentation Foundation (WPF, formerly called Avalon) and WPF/E (cross platform subset of WPF). The demos that I saw really showed me what the next generation of rich, web-based interfaces could look like beyond today's AJAX and Flash. While WPF is great for applications, the fact that WPF/e is cross platform really opened my eyes to this being a potential Flash killer. That being said, since WPF/e is programmed using XAML and Javascript, a couple of the demos I saw were web pages with some flash elements included as well. For more detail on WPF/e, I suggest reading Ben Galbraith's blog post on Ajaxian (excerpt below):

WPF/E allows a subset of XAML to be rendered in a browser on IE and Firefox on Windows and Safari (Firefox?) on OS X (Linux and Solaris support uncertain).

This subset consists of a pretty impressive set of functionality, including: 2D vector graphics, advanced text rendering, audio/video playback, imaging, animation, and advanced composition of graphical elements. In short, all of the pretty eye-candy coming in the new WinFX APIs with the exception of 3D graphics and the Metro document rendering (i.e., MSFT’s PDF killer; my my, they are really going after Adobe, aren’t they?).

Given the rich, interactive functionality that WPF and WPF/e offers end users and the productivity improvements it provides for developers and designers, I do believe that this will be one technology that will gain traction in the years ahead.

]]>http://www.beyondvc.com/2006/05/microsoft_vc_su-2.html/feed11VCs and VOIPhttp://www.beyondvc.com/2006/04/vcs_and_voip.html
http://www.beyondvc.com/2006/04/vcs_and_voip.html#commentsThu, 27 Apr 2006 11:32:53 +0000http://localhost/wp_beyond/?p=207Here is a link to an article on VCs and VOIP (via Andy Abramson of VOIPWatch). There are some VCs who think it it too crowded and others (like myself) who still see opportunities. However, the one thing I was not pleased about is that the only quote the author uses for me did not include the rest of our conversation. I should have just pointed her to my blog post from last September on the topic where I say that:

This battleground is about software and not devices which is why I believe companies entering this market from a telephone-centric view of the world will miss out on a big opportunity.

When I say, VOIP is "moving beyond Vonage" what I mean is that the opportunity is not about making and receiving calls but about how VOIP becomes seamlessly embedded in all applications, into the very fabric of the web. Imagine seeing any phone number on a web page and clicking it to dial seamlessly. Or how about being in your CRM application and knowing which of your sales reps are online as you are reviewing the pipeline and clicking to IM or call them through the CRM app. When you call them, you have no idea if they receive the call on their home phone, computer, wifi device, or cell phone. All you know is that they are available and that you can call them with one click. This is the direction we are heading in - it will take time, but it will be interesting and it is certainly more than just a phone call. If you want to learn more about this I suggest reading Alec Saunders from Iotum's post on Voice 2.0. As Alec says, :

In the voice 2.0 world any application, within the bounds of permissions set by the subscriber, can access presence; initiate, accept, and redirect calls; and query directories.

Alec gets it and this is certainly some of the stuff we have up our sleeve at Sipphone, developers of Gizmo Project.

]]>http://www.beyondvc.com/2006/04/vcs_and_voip.html/feed1Kinnernet 2006 – geek camphttp://www.beyondvc.com/2006/04/kinnernet_2006.html
http://www.beyondvc.com/2006/04/kinnernet_2006.html#commentsMon, 03 Apr 2006 15:57:00 +0000http://localhost/wp_beyond/?p=210I just got back from a week in Israel having spent some time in Jerusalem for an Answers board meeting and then making my way to the Ohalo Resort on the Sea of Galilee for Kinnernet 2006. Kinnernet is a techie geek camp organized and run by Yossi Vardi (cofounder of ICQ). At Kinnernet, I had the privilege to spend time with some great people from Israel, Europe, and the US. I suggest checking out Jeff Pulver's blog and going to Flickr and searching for Kinnernet2006 for pictures and more thoughts on Kinnernet. There were lots of robots, aerial shows with model planes and helicopters, great discussions on current technology trends, and of course, plenty of beer and laughs.

One of the discussion groups that I led with Simon Levene (heads up Corp Dev in Europe for Yahoo and Yair Goldfinger (founder and CTO of ICQ and Dotomi) was titled "Are Internet VCs Dead." You know the backdrop - it costs less to get a company started and to generate users and Google and Yahoo are agressively snapping up companies before VC rounds. Google's expertise seems to be buying engineers, many times before a product is even launched. Yahoo, on the other hand, prefers to buy companies that have some nice user base, maybe no revenue model yet, but also before a VC round. The last point is that companies are now more capital efficient (see an earlier blog post) where $10-15mm can get a company to cash flow breakeven vs. $30mm. So what do VCs that invest in Internet companies do? Before I go there, I would flip the question and ask what do entrepreneurs do? From my perspective, I wouldn't take in more than $1-2mm to get my company started with a developed product and an idea of what usage will look like. At that point, as Yair suggests, it is decision time. Some of the questions to ask include:

1. Do I have a product or feature or can I build a real company (i.e., a growing cash flow sustaining business)? 2. What is the risk I face in building a company for the long term vs. selling today. 3. And finally, do the math - if I take in VC money I will clearly have to sell for alot more tomorrow than what I sell for today in order to generate the same or greater value.4. Do I want to do it?

As a VC, I truly would not want to invest in a company that has not thought about all of the above with a founding team that is fully behind building out the company for a longer term play. All that being said, the numbers are still against the entrepreneur. While there have been a number of acquisitions in the past year, it is still a fraction of the number of companies started. Since it is so cheap to start a business, you can have anywhere from 5-10 companies out there in each category. In addition, it is not clear that many of the acqusitions during the past year could have built real businesses rather than being a feature of a much larger entity. While the math worked for a number of enterpreneurs that sold, one of the decisions you need to make is the likelihood and timing of being crushed by a larger player if you decide to go alone and raise VC funding. Whatever you start, I would suggest thinking about what your potential revenue model is from day 1 and thinking through the economics. Hell, it may change a couple of times, but building a company with the sole purpose of flipping is the wrong idea as your odds of success are very low.

Despite this, the opportunity for entrepeneurs and VCs could not be greater. There are clearly more users globally, broadband is everywhere, users are more educated, companies can target more, capital efficiency has increased, and there are real business models out there generating tons of profits. I do not think that Internet VCs are dead, but rather, need to reinvent themselves. It is also clear that the VC model is broken and needs to change. As you can see this is slowly starting to happen as smaller funds ($200mm vs $750mm) are being raised, VCs are doing less new deals per year and sitting on less boards, and many are trying to get in earlier. Having a smaller, more focused fund allows a VC to make some investments during the Angel round ($500k-$1mm), watch the company closely, and give VCs the opportunity to lead the first real institutional round. If the company has the chance to flip, then great, everyone wins. If the company want to take the next step, then we can be there to lead or co-lead the next funding round. It is imperative for VCs to get in early and structure their funds around this because in the Internet space companies can build momentum quite quickly which also means that valuations tend to move quickly as well. That is also why the Googles and Yahoos of the world are trying to identify the emerging opportunities before the VCs get involved.

All in all, it was a wonderful time, and I feel honored to have been one of Yossi's guests and for having had the opportunity to network and participate with Israel's tech elite. Unfortunately, I had to head home on a redye Saturday night, but many of the attendees ventured to the Marker Tech Conference where 3500 people were expected to attend and hear panel discussions led by many of the participants at Yossi's Kinnernet. Kinnernet was great and I had a blast, made many new friends, and came away clearly impressed with Israel's thriving and talented startup community.

]]>http://www.beyondvc.com/2006/04/kinnernet_2006.html/feed1Eat when dinner is servedhttp://www.beyondvc.com/2006/03/preemptive_fina.html
http://www.beyondvc.com/2006/03/preemptive_fina.html#commentsMon, 20 Mar 2006 14:18:00 +0000http://localhost/wp_beyond/?p=213There is an article in the Wall Street Journal (sorry-requires subscription) today on pre-emptive financings or financings that happen when a company is not actually looking for capital. It is common wisdom amongst the investment community for entrepreneurs to "eat when dinner is being served." In other words, companies should take cash even if they don't really need it because you never know when the next meal will be served. This can be great for a company because it can provide a nice cash cushion for the operations, allow a company to spend real time with a potential investor, and help them avoid spending too many cycles on financing down the road. The article also points out that this is a new trend not unlike one that happened during the bubble period. To be honest with you, I don't see this as a new trend and a negative thing for VCs to do. It is a VC's job to find the best investment opportunities which means being proactive about generating deal flow and not sitting back waiting for new deals to come to us. Being proactive about new deals means spending time with entrepreneurs before they need money, staying in dialogue with them as they grow their business, and helping lead discussions on the next round of financing.

Being an early stage investor, I have played on both sides of the fence. I have been on boards where we have been approached preemptively by other investors. In those cases, it is helpful to think about two points:

1. Valuation isn't everything - sure, you want to take cash at a good price but if you take too much cash at too high a price too early, it builds unrealistic expectations for you, your company, your existing investor, and your new investors. You may end up chasing too many different opportunities, losing focus, and having a fractured board because of these lofty expectations.2. Having too much cash can be a curse and not a blessing - speaks for itself (see my last post)

On the other side of the fence, it is important for us proactive VCs to maintain our discipline, value the opportunity fairly, and really understand and work with the company to determine how the money will be used. In addition, we need to be careful about helping our companies use their bullets on the right opportunities and not every opportunity. Let's not forget the lessons learned during the bubble where companies with too much cash just crashed, burned, and died faster and more spectacularly than ones with less cash. In general, pre-emptive financings can be a great thing for both VCs and entrepreneurs, but we must be careful about managing expectations and staying focused.

]]>http://www.beyondvc.com/2006/03/preemptive_fina.html/feed3Having too much money can be a curse, not a blessinghttp://www.beyondvc.com/2006/03/money_does_not_.html
http://www.beyondvc.com/2006/03/money_does_not_.html#commentsWed, 01 Mar 2006 12:31:00 +0000http://localhost/wp_beyond/?p=216Trust me, I love having well capitalized companies. However, having too much money can be a curse, not a blessing. More often than not, I see management lose financial discipline and avoid making hard decisions when capital is abundant and not scarce. To many executives, money does solve all problems. And yes, having money allows an entrepreneur to do many things with his business like hire more talent, scale the back-end infrastructure, and ramp up sales and marketing. On the other hand, when an entrepreneur has too much money, the tendency is to throw more money to fix a problem. Sales are not ramping up quickly enough so let's hire more sales people. Marketing is not generating enough leads so let's spend more money on lead generation. Engineering keeps missing its product release date so let's hire more engineers. And what happens is that more money gets poured in and that only exacerbates the problem as management never really spends the time to dig deep to understand what the underlying issue is and to fix it at the source rather than layer on more resources. In other words, an entrepreneur only hastens his downward spiral by spending more money on an inefficient business strategy.

On the flip side, I have seen many an entrepreneur create successful businesses who some could argue were slightly cash-starved. I am not arguing for entrepreneurs to starve their companies of the resources they need, but what I am suggesting is that having too much money can make one lose their creativity in terms of allocating scarce resources to grow a business. This is especially quite important during the early stages of company development. An entrepreneur needs to experiment with various ways to reach his target market, generate revenue, and develop product. An entrepreneur also needs to stay focused, disciplined, and make hard decisions in terms of where to focus company resources. Too much capital can kill this need. Throwing too much money at the wrong strategy or too many different areas only adds fuel to the fire. While money can really help an entrepreneur scale a business, having too much can be a curse.

]]>http://www.beyondvc.com/2006/03/money_does_not_.html/feed9Why we invested in Sipphone, developers of Gizmo Projecthttp://www.beyondvc.com/2006/02/why_we_invested.html
http://www.beyondvc.com/2006/02/why_we_invested.html#commentsWed, 15 Feb 2006 10:12:00 +0000http://localhost/wp_beyond/?p=217Dawntreader Ventures has just led a $6mm round of financing in Sipphone, its first outside round of capital. We look forward to working with Michael Robertson and Jason Droege to fuel continued growth in the Sipphone and Gizmo Project service and to roll out new features and functionality. As you can see from Michael Robertson's blog, the basic premise of the company is to provide SIP-based dial tone to any software or hardware device. For those of you who don't know, SIP is a standard protocol for voice and video.

Gizmo Project voice calling and IM is booming on Macintosh, Microsoft Windows, and Linux computers because Gizmo Project works well and connects with every type of device like WiFi phones, other VOIP and IM directories like GoogleTalk and even the popular open source Asterisk PBX software. I think people are beginning to understand the difference between Skype who walls their customers in and won't play nicely with anyone and SIPphone who connects to everyone making it possible to have just one address. Next week SIPphone will announce closing of a major venture capital deal which will help the company grow even faster.

As you can read in an earlier post, I, like Michael, am a believer in the growth of open standards. We want to provide consumers with the ability to have one address and connect to anyone on any network. We want to expose our APIs to allow anyone or any company to easily integrate our VOIP/IM service into any application or device. In addition, we want to make it extremely easy for consumers to bridge the Internet and traditional PSTN by extending the SIP functionality to non-PC devices such as routers, wifi devices, adapters, and dual mode cell phones.

While there are a number of factors that go into an investment decision, these are the key highlights for us. Sipphone has a strong team led by Michael Robertson (founder of MP3.com) and Jason Droege (founder of Scour.net, first video search engine). They know how to develop and market great consumer products and services on the web. The market is huge as only a tiny fraction of overall global voice traffic is VOIP-based on the end-consumer side. This is not a zero sum game between other VOIP/IM players but between the incumbents driving analog telephony and the new players driving digital subscriber growth. Sipphone has demonstrated it has a winning product that can grow its user base and upgrade free users into paying customers for value added services and features. The cost of sales and marketing is zero as Sipphone is a frictionless sale, especially when compared to a Vonage. Finally, I believe that consumers are smart and demand interoperability and that open standards will win.

]]>http://www.beyondvc.com/2006/02/why_we_invested.html/feed8Tips for the first VC Meetinghttp://www.beyondvc.com/2005/11/tips_for_the_fi.html
http://www.beyondvc.com/2005/11/tips_for_the_fi.html#commentsTue, 29 Nov 2005 21:06:08 +0000http://localhost/wp_beyond/?p=231I had a meeting last week where an entrepreneur insisted on showing me a demo first. He was scrambling around asking for wireless keys and looking for ethernet jacks, while I sat there and tried to engage him in conversation. He lost my interest right then and there. As I started to think more about it, I thought it would be helpful to share some of my thoughts on how to make the first VC pitch a better experience for all participants.

1. Be flexible: Have an agenda but listen to and know your audience. If the VC wants to run a meeting a certain way, be flexible, and go with the flow. I have seen many a pitch where an entrepreneur comes in with an agenda and wants to go through each powerpoint slide in excruciating detail. These meetings typically do not last very long as I wonder what it would be like working with that person or for that person. Deal with questions as they come up, not later. VCs can be impatient at times, and it really bothers me when an entrepreneur says, "Let's wait until slide 15" especially when you are just on slide 3. Meetings have a rhythm so be in sych with your audience. Startups require entrepreneurs to be agile and adept to respond to quickly changing market needs. If you are too engrossed with following every powerpoint slide, it makes me wonder how flexible you will be in responding to market conditions.

2. Have a well-honed elevator pitch: If you can't explain to me succinctly what your product does, what problem it solves, and how you will make money then I wonder how you will explain it to your customers. Don't worry, I want to see your baby in action, but save the demo for later as I want to hear you articulate these points first.

3. The Slide Deck: make it short and sweet, 15-20 slides will do. However, the best meetings happen when we never even touch the slide deck and end up in a free form conversation about the team, product, business, and market. Many times, I have even found myself brainstorming with the entrepreneur about other revenue opportunities and go-to-market strategies - I just love those types of meetings.

4. Listen and ask questions: try to get feedback about your business and the opportunity. The meeting is not a one-way street. Make sure you figure out if you like me, my firm, and my style as much as I am looking for a similar fit. Remember, it is a competitive market out there, and I need to sell my value add to you as well. Asks lots of questions - be open to feedback but do not be afraid to respectfully disagree. Not all of the feedback you receive will be right and many times it will be wrong, but take all the data you can so you can be better prepared for the next VC pitch.

4. The Demo: First, if you have any web-based business, I would hope that you have the wherewithal to have an alpha version running. As we all know it is cheap to start a company, and if you have not taken the first steps to get a product/service up and running, I am going to wonder whether you have the technical know-how to make it happen or the passion and risk-seeking behavior to be an entrepreneur. I love it when entrepreneurs have sunk some of their own money into their business or substantial amounts of time to turn their dream into reality. This shows me a real level of commitment. With respect to the demo, I like them live, but as Bob Rosenschein once told me, there are 20 things that can happen in a demo, 19 of which can go wrong. So be prepared and have a cached version of your service to walk through.

5. Next steps: In any meeting, never forget to ask about the next steps. What is the VC firm's process, when will they expect to get back to you, is there any more information that you can provide, etc...

A couple of other points to add:

Pre-meeting: Research the VC, the firm and get to know the types of investments that he/she likes to make, that the firm likes to make, and what is currently in their portfolio. Google is a great resource, look for VC blogs, and talk to others that may have pitched the VC and the firm recently. We need to sell to you as much as you need to sell to us.

A couple of don'ts: don't be late, don't be arrogant, and don't ask for an NDA before you start the pitch

Happy pitching!

]]>http://www.beyondvc.com/2005/11/tips_for_the_fi.html/feed22Beware of fishing expeditionshttp://www.beyondvc.com/2005/10/fishing_expedit.html
http://www.beyondvc.com/2005/10/fishing_expedit.html#commentsMon, 31 Oct 2005 15:14:43 +0000http://localhost/wp_beyond/?p=237A number of our portfolio companies have been fielding calls from strategic buyers expressing an interest in acquisition. This is great news since many of the better acquisitions come whencompanies are bought and not sold. For a startup, it can be quite flattering to have a large competitor or suitor express an interest in buying your company. However, as an entrepreneur you have to be skeptical as many of these calls end up as just another fishing expedition from the strategic buyer. I have seen too many companies get overly excited about these acquisition feelers and waste time educating the potential acquirer only for the acquirer to either do nothing, build it themselves, or buy a competitor. In fact, you have to recognize and assume that many of these initial calls are just fishing expeditions where a strategic buyer is just trying to get as much information as they can about a market and the competitive landscape. You have to assume that they are talking to all of your competitors as well. Before taking your first meeting, make sure you get as much information you can to gauge the real interest in your company. Here are some questions you should be asking or thinking of during your initial conversation.

Who is calling you, what is their role, and what have they acquired in the past? You need to determine whether it is just a junior person screening or if it is someone with real clout and decision making power.

Why do they want to enter this market and what is the decision making process by which they will make a build/buy decision? If they are early in the process, you have to be concerned about wasting your time, educating a potential buyer about your market, and going nowhere with your conversations.

Have they talked to anyone else? In many cases, an acquirer may already know who they want to buy, but will still talk to other players to fully understand the market and the competitive landscape and to use you as negotiating leverage.

What are they looking for in terms of an acquisition? Revenue, product, management, both?

Who is responsible for making the acquisition work, and how does the acquirer intend to integrate your company into the existing infrastructure? Will the acquisition be run as a separate, stand-alone unit or will it report to a certain group. Knowing this will further help you understand the decision-making process of the acquirer, and who you may need to influence to get a deal done.

Before your first meeting, here are some questions you should have answered yourself:

What other acquisitions have they done, what multiples did they pay, and how recent were the deals? If the buyer hasn't done many acquisitions or if they paid low multiples do not start thinking about pie in the sky valuations for your company.

What is the company's market cap and how much cash is on their balance sheet? If your selling price is too high for the buyer based on the buyer's market cap or cash on hand, don't waste your time educating them about your product and the market.

Use your network to talk to some of the management or venture investors of companies that were recently acquired by the buyer to determine what their process was and to figure out if the opportunity is real or just a fishing expedition.

What is the corporate culture? Does the acquirer have an NIH (not invented here) syndrome or is there a history of openly collaborating with partners and looking outside for new technology?

Once again, it is always nice to have a large company call you and express acquisition interest. That being said, go into the conversations with a skeptical eye and make sure you do not waste your time as these strategic discussions can quickly lead to a dead end if not managed appropriately. The tricky part of the dance is trying to establish early in the process a range that the acquirer will potentially pay for your company assuming everything you tell them is true. The sooner you can get to this answer the sooner you will know if you should continue talking or just walk away. If you manage this process appropriately you may find yourself in a great place as many of the best acquisitions happen when companies are bought and not sold. The downside is that these discussions can suck up lots of your precious resources and be a tremendous distraction to your management team.

]]>http://www.beyondvc.com/2005/10/fishing_expedit.html/feed14VC Blogs – the old and newhttp://www.beyondvc.com/2005/10/vc_blogs.html
http://www.beyondvc.com/2005/10/vc_blogs.html#commentsFri, 28 Oct 2005 07:31:27 +0000http://localhost/wp_beyond/?p=238I was in California 3 weeks ago when Jeff Nolan told me he was leaving SAP Ventures and moving to a new group within SAP desgined to "Kill Oracle." We talked about all of the great innovation happening on the web, much of which is consumer-focused, and why it was a good time to make a switch. Yes, SAP is the dominant player in the enterprise market and even after you account for Oracle's acquisition binge Oracle still remains the distant number 2 player in enterprise software. That being said, there are new technologies and new ways of doing business which SAP must keep close tabs on as it maintains its dominance - think service oriented architectures, SaaS, and new markets to enter and conquer. So I am sad to see one of my VC buddies go back to the operational side, but I look forward to working with him closely as he helps SAP evolve its stategy and maintain its leadership.

Another VC friend, Scott Maxwell of Insight Venture Partners, has launched a new blog with encouragement from myself and Brad Feld. Many of the VC bloggers on the web are early stage focused so Scott will bring a unique twist to the VC blogging world by focusing on expansion stage companies that have a product and some decent quarterly revenue. As Scott mentions in his post:

The issues faced by technology companies at this stage of development are very different that early stage companies. The major issues are around distribution strategy and execution, but as companies scale they tend to need more formal development approaches and have many other process, organization, skill, and staffing gaps as well. Every CEO is also looking for more leads, customer introductions, and ongoing advice in every category, personal and professional.

I tend to agree with Scott so if you want a different perspective, a perspective of what your later round VC is looking for, I suggest putting Scott's blog on your must read list.

]]>http://www.beyondvc.com/2005/10/vc_blogs.html/feed1Web 2.0 Bubblehttp://www.beyondvc.com/2005/10/web_20_bubble.html
http://www.beyondvc.com/2005/10/web_20_bubble.html#commentsWed, 19 Oct 2005 17:42:00 +0000http://localhost/wp_beyond/?p=239I had an enjoyable lunch with Jeff Jarvis today catching up on a number of things and brainstorming about value in the next generation web. During the conversation I vented a little frustration at the use of buzz words and bubble-like mentality with terms like Web 2.0. I am starting to get extremely tired and frustrated about every pitch that I see now where a company claims they are a Web 2.0 company and lists their principal reasons for being Web 2.0. It reminds me of the mid-90s when everyone said they were an Internet company and sprinkled their pitch with wild growth expectations from Jupiter Communications. Or when everyone said they were a Java company when Java was the cool buzzword. Frankly I do not care if you are Web 2.0, Web 1.0, etc. All I care about is what your service or product does, why it is valuable to the end user, why it is uniquely different from the competition, what the barriers to entry are, and how you plan on reaching your customers and how you will ultimately make money. Don't start your pitch with Web 2.0 ecochamber talk. In fact as Jeff and I discussed several companies and ideas, we concluded that most of them were just features and not companies. And as Jeff states, when small is the new big, then it poses problems for VCs as well.

Then Ed and I were talking about similar challenges for investors and entrepreneurs in the small-is-the-new-big age: Today, it’s much, much easier to start a new company on far, far less capital than it used to be. But this also means that it’s easier for someone else to start a competitor. So speed is more important than ever: You have to develop your business as quickly and nimbly as possible to build your product and then perfect it after it’s out so you quickly establish your value. This means that the VCs need to be able to act just as nimbly to invest as quickly as possible. The good news is that the investments are smaller and the risk is thus less. But the bad news, of course, is that it costs more effort and attention to manage many more smaller investments and it’s hard to act quickly at scale. Early bird, worm, and all that.

While getting in early and being nimble is a great way to make money, no matter how early you go, it is hard to build a sustainable VC portfolio investing in features. As an entrepreneur, if you can get up and running for $20-30k, so can 10 other talented people. Fred Wilson and a new VC blogger, Peter Rip, have written some thoughtful posts about a bubble mentality developing. I have written about it before as well in an earlier post comparing and contrasting 1999 vs today.

In other words, these business models are quite capital efficient. It is no wonder why VCs are quite excited about next generation web companies. All that being said, I, like others, worry about believing all of our own hype, and moving ourselves to another bubble. As you see from Tim's map and my table above, if it costs less to build and launch a company, then the barriers to entry must be lower as well.

So if you are an entrepreneur, stop talking about Web 2.0 and start talking about how you are going to scale your business and make money. Start talking about how you are going to create a defensible barrier to entry. Better yet, since it is so cheap and easy to get started show me whay you are not just a feature, show me your user growth, and show me how you will maintain your competitive advantage. Sure, as a startup, you will not have all of the answers and your business model may change, but show me that you care about these business concepts and that you have thought through these issues. While I am a big believer in the promise of the web, I see this less as a revolution but more an evolution from where we started in the mid-90s. We are talking about the same principles as the mid-90s, and we would not be here today were it not for the incredibly painful bursting of the last bubble. But with every bubble bursting comes a rebirth and from the last bubble what we have is lots of cheap bandwidth, resilient entrepreneurs who scraped for crumbs to survive, and a mentality to do it cheaply (rise of open source and leveraging commodity inputs). What we also have today versus yesterday are business models that can scale cheaply, be profitable, and throw off lots of cash. Let's focus more on these concepts versus being Web 2.0, as I do not want to think about what kind of rebirth will come from another bubble.

]]>http://www.beyondvc.com/2005/10/web_20_bubble.html/feed21Venture Capital and Hedge Fundshttp://www.beyondvc.com/2005/09/venture_capital.html
http://www.beyondvc.com/2005/09/venture_capital.html#commentsWed, 28 Sep 2005 10:33:08 +0000http://localhost/wp_beyond/?p=246Well, there is clearly lots of money sloshing around in alternative assets like hedge funds, private equity, and venture capital. That being said, I still believe there are plenty of great investment opportunities. In an earlier post titled, "Go Early, Go Late, or Go Home," I shared some of my thoughts on what company stages of development looked attractive for investing. In addition, I highlighted the blurring of hedge funds and private equity. As hedge funds receive more dollars and the markets, therefore, become more efficient, hedge funds need to find new ways to generate returns. Increasingly, hedge funds are moving just from private equity and now more aggressively into venture capital. Barron's highlights this trend in an article from this past week's edition.

Investors had better take notice. As hedge funds search for new strategies to produce the holy grail of "alpha," or outsized returns relative to risk, private-equity investments of all stripes are suddenly turning up in the industry's portfolios.

The holdings -- ranging from modest positions in startup companies to multibillion dollar corporate buyouts to a variety of more esoteric instruments, like subordinated debt -- already amount to $65 billion, or 7% of hedge-fund investments, according to estimates by Freeman & Co., a New York-based financial boutique. That tally, the firm believes, could swell to $100 billion by next year.

Today's Wall Street Journal has an article (can't find online source but in Marketplace B3C) on hedge funds entering the venture capital market. It is no secret that hedge funds took flyers on early stage tech companies during the bubble. However, what's different this time is that hedge funds are looking to create separate vehicles to make venture capital investments with a longer time frame to withdraw capital. As the article states, the big concern is if hedge funds can be patient enough to generate the needed returns. Instead of worrying about the tick, hedge funds need to understand that VC is a 5 year game plan. The other area of concern for me is the idea of even more money plowing into early stage deals. I can vividly remember during the boom being priced out of a few deals from some hedge funds who were willing to give money at a higher valuation with less oversight to eager entrepreneurs. All this being said, this trend is just starting but one to which we should pay close attention. I just do not want all of this capital to end up badly in the next bubble.

]]>http://www.beyondvc.com/2005/09/venture_capital.html/feed0.Net and VC Loyaltyhttp://www.beyondvc.com/2005/07/net_and_vc_loya.html
http://www.beyondvc.com/2005/07/net_and_vc_loya.html#commentsTue, 19 Jul 2005 10:25:33 +0000http://localhost/wp_beyond/?p=251Robert Scoble has asked the VCs to respond to an eWeek article titled Is .Net Failing to Draw Venture Capital Loyalty?. There is not much for me to add to this article as we all know that the only loyalty VCs have is to their Limited Partners to generate long-term capital gains. This means we do not fund a company because of what technology platform it chooses to develop on but rather what problem the company and product is solving and how big that opportunity is. It reminds me of a panel that I spoke on in 1997 at the Red Herring Java Technology Conference. The moderator asked me what types of Java companies we were interested in and my reply was that we do not look for Java companies, but rather solid management teams that are solving large problems in innovative ways. If Java happens to be the right technology platform to use, then so be it. Nothing has changed since then. As Brad Silverberg from Ignition rightly says in the eWeek article, "We're technology agnostic here at Ignition."

To that end, let me talk about .Net. I have spent time over the last few years with .Net evangelists and they have been helpful in certain situations. That being said, most of the fund's portfolio companies (90%+) are not using a .Net platform. When I dig deeper into technology and platform decisions, I like to think in 2 separate buckets, the consumer market and the enterprise market. On the consumer side, one big value for Microsoft has been its hold on the desktop as Tim Oren strongly points out, but as we move more and more into a web-based world its strength is diminishing. Look at Google, Firefox and new scripting services like Greasemonkey and Yubnub which are increasingly offering users more and more functionality through a web-based interface. I am sure Microsoft will get it right with Longhorn but it has taken way too long and many a more nimble, startup has out-innovated Microsoft and decreased its competitive advantage. While the OS is important, Microsoft has lost its complete and utter dominance as we move to a service-oriented world where broadband is everywhere, apps are in the cloud, and the browser becomes king. All that being said, I will not make my decision to fund a startup based on whether or not it uses .Net. For example, if you want to see a great app built on .Net go to a friend's web service, Phanfare, and try using the application.

On the enterprise side, the only reason I would support having a company move off an existing platform to .Net is if there was significant customer demand for it and if Microsoft would really provide the company with access to its channel. Microsoft has been putting a huge effort in promoting their go-to-market support for startups but the irony is that Microsoft really wants companies to develop vertical, industry-specific applications on the .Net architecture. In other words, many of these companies are nice businesses but not venture-backable opportunities where VCs can make big returns. If Microsoft can change this attitude and show me where and how to make money leveraging its Ecosystem and partners, I am all ears. In the end VCs have be loyal to its Limited Partners, not a technology platform, so the eWeek article itself is overblown.

]]>http://www.beyondvc.com/2005/07/net_and_vc_loya.html/feed3LP Conferencehttp://www.beyondvc.com/2005/06/lp_conference.html
http://www.beyondvc.com/2005/06/lp_conference.html#commentsWed, 29 Jun 2005 07:44:48 +0000http://localhost/wp_beyond/?p=254I am not sure how many entrepreneurs understand the structure of venture capital funds but the bottom line is that while VCs manage funds, we ultimately report to our investors or Limited Partners (LPs). It is not our money, and we have a fiduciary responsibility to manage it properly and generate the returns our LPs expect of us. And like you, we have to go out and raise capital every 3-5 years for a new fund and similar to entrepreneurs we need to network with the right people, have the right meetings, and go through extensive due diligence. Every year the Dow Jones Private Equity Analyst puts together a show where fund managers can listen to what the LP community is interested in and where they plan on allocating their dollars. This year's show was billed as an opportunity to meet "more LPs per square foot" but truth be told, it was a place where I could meet more VCs or private equity managers per square foot. In the early morning, a show of hands revealed about a 20% LP audience and 80% fund manager group. It reminded me of a typical VC/entrepreneur conference where you have panels of VCs talking about where they want to allocate capital and entrepreneurs trying to flag them down to hear a pitch. In these conference you typically have a similar ratio, 20% VCs or those with the money and 80% entrepreneurs or those seeking funds.

Anyway, as I had time to think about it, it might be helpful for entrepreneurs to understand how VC funds operate to better understand our motivations and to better align interests. At the end of the day, VCs are in the capital gains business. We make money when our LPs make money which means that the companies we fund and entrepreneurs that we back need to be successful. Clearly when VCs and their LPs negotiate their agreement, economics are the most important topic at stake. While VCs get management fees to pay the bills, it is the carried interest portion or % of profits that VCs receive that really drives our thinking and aligns our economics with performance. In any typical fund, we except 1 to 2 deals to be homeruns with 10x or greater returns, 3-4 to be pretty good returns, and the rest to either get our money back or lose money. What that means is that every one of our deals needs to have significant return potential and market size for us to think about investing in a deal. In addition, companies should be capital efficient (see an earlier post on capital efficient business models) meaning that no more than $25-30mm should go in, especially if a home run deal acquisition is $200-300mm (not $1b). If only 1 to 2 deals have home run potential, the chances of us getting any one of them to really work is slim to none. If the majority have this potential, we get more at bats at the plate and more opportunity to create real value for the fund. As a fund matures, VCs need to demonstrate real cash-on-cash returns to go out and raise the next fund.

This is the point at which conflict could exist. First, there could be situations where the VC says no to a great opportunity to sell the company but for whatever reason wants to hold out for a greater return. On the other hand, there could be situations where a VC wants to exit too early with a decent return but not optimizing the overall value of the company in order to return capital to investors. At the end of the day, what this means is that entrepreneurs and VCs need to get on the same page pre-investment in terms of everyone's expectations for performance and goals. In addition, there needs to be constant communication as the markets and company evolves to ensure this alignment. The good news is that given a VCs economics, we only do well when the entrepreneur and company does well so what better alignment could there be. A point of diligence for entrepreneurs could be understanding where in the fund lifecycle a VC is and what some of their returns to date have been.

]]>http://www.beyondvc.com/2005/06/lp_conference.html/feed1The laws of supply and demand for VCs and IT Buyershttp://www.beyondvc.com/2005/06/supply_and_dema.html
http://www.beyondvc.com/2005/06/supply_and_dema.html#commentsWed, 08 Jun 2005 10:44:16 +0000http://localhost/wp_beyond/?p=255There is a supply and demand equation for every startup's product or service. In early stage companies, I sometimes see too much from the supply side and not enough from the demand part of the equation. In other words, inventing great products that no one wants to buy is a waste of time, money and effort. While there are not nearly the amount of startups on the East Coast as in Silicon Valley, being in New York I do have tremendous access to Fortune 500 companies. One of the ways we like to invest is by talking with the buyers in the market, the CIOs and CSOs, and understanding what their pain points are, what solutions they are evaluating, and how open they are to working with early stage companies. We have gotten many a referral using this methodology and it has helped us develop our own investment thesis on certain markets where we can look ahead far enough into the future but not so far ahead that we invest in just another technology looking for a problem to solve. We also like to speak with strategic partners and understand gaps in their product portfolio (to the extent they will share that with us) to further triangulate our thoughts on the market. Bill Burnham has a great post on thesis-driven investing and why it matters in today's competitive venture world.

Tying together a demand-driven approach to investing means that you have to have access to the IT decision makers with the budgets. This is typically not easy as every tech vendor in the world is pounding on their door to give them a pitch. That being said, if there are more IT buyers like James McGovern that understands the value that VCs can bring to IT buyers then we will all be in great shape funding companies that solve real problems. James, an enterprise architect at a major Fortune 100 company, recently wrote a post on ITtoolbox explaining how his brethren can continue to innovate and stay ahead of the curve. He goes on to say:

The methodology used today within corporate America is fundamentally busted. Sitting around waiting for a vendor to show up on your doorstep with the right solution at the right time is simply gambling (I really wanted to say irresponsible). Enterprise architects need to not sit on their butts waiting for the "right" solution to magically appear. Instead they need to make sure the venture capital community understands what problems we face so that they fund the right portfolio companies.

Competitive advantage within corporate America via the use of technology isn't gained by implementing service-oriented architectures or any of the other hype in published in industry magazines. SOA is a reality of today's marketplace and everyone will be doing it (hopefully doing it the right way by purchasing my upcoming book).

Competitive advantage can be gained though by being first to implement new waves of technologies before your competitors even learn about it or it appears in a matrix by your friendly neighborhood industry analyst. It is in the best interest of enterprise architects to start setting aside time to learn about technologies that are not yet released within the marketplace and are seeds within the minds of CTOs of Internet startups.

With this thought in mind, I have decided to take deliberate action in making this situation better for both parties. I am reserving Friday's at 5pm on my calendar to talk with venture capital firms who want to bounce ideas off me related to funding or to listen to the pitches of early stage Internet startups that simply need a sounding board for someone who sits in the walls of corporate America on a daily basis...

The same principles go with VCs as well - sitting around waiting for deal flow in this competitive VC market will not get you very far. Be proactive, develop an investment thesis, and reach out to the end users like James - I wish more IT buyers thought like him. Of course, as VCs we must remember not to solely rely on the buyer's advice and use as many data points as we can to further validate or kill our investment thesis. The danger of solely relying on IT buyers is that the solution may only be necessary for a handful of buyers and that the problem is so near term that by the time your product is ready another vendor has already stepped in to fill the void.

]]>http://www.beyondvc.com/2005/06/supply_and_dema.html/feed14Fundraising is a distractionhttp://www.beyondvc.com/2005/05/fundraising_is_.html
http://www.beyondvc.com/2005/05/fundraising_is_.html#commentsFri, 13 May 2005 07:40:39 +0000http://localhost/wp_beyond/?p=257I was speaking with a friend yesterday who recently signed a term sheet to raise a Series B round. While he did not hit it out of the park with the valuation, it was a nice step-up none-the-less and would provide his company with the capital to move forward and stay ahead of its competition. He and I both fully acknowledged that he could have pushed the valuation higher if he spent time with more than two venture firms, but we both agreed that the right thing to do was take the money and build the business. This was an easy decision because fundraising is a distraction and valuation isn't everything. When you are a lean and mean startup where you are just beginning to build your management team, every second you spend fundraising means more time that you are not working on your business. I have seen too many entrepreneurs go on the VC tour, spend too much time on fundraising, and consequently miss important milestones. In the end, the extensive fundraising process ends up backfiring since the VCs get concerned about lack of progress. So the next time you are faced with the prospect of raising money painlessly and quickly, the slight discount you take on your valuation today will be well worth it in terms of what you can do to build your business and continue innovating your product or service.]]>http://www.beyondvc.com/2005/05/fundraising_is_.html/feed4Venture capital in Chinahttp://www.beyondvc.com/2005/04/venture_capital-2.html
http://www.beyondvc.com/2005/04/venture_capital-2.html#commentsFri, 29 Apr 2005 06:31:22 +0000http://localhost/wp_beyond/?p=259I recently caught up with my friend Derek Sulger, founder of Linktone (Nasdaq: LTON) and current founder and CFO of Smartpay, a Paypal-like play in China (I really like what Derek is doing with this one-no credit in China, use the mobile phones for debiting from bank accounts). Derek and I are college friends and we certainly have come a long way from college when he finds my email on Google under a heading "Geeking out with Ed Sim" (thanks to Jeff Clavier for this one!) because his mobile device with all of his data on it is cracked on his flight from China. That being said, we had a great chat on VC in China and opportunities he sees there.

First, from his perspective, he would rather pick one or two ventures at a time then spread out investments VC style. If you think about it, there have only been around 7 or 8 internet-type companies that have gone public in China since the last bubble in the US (Linktone is one of those) when the Sina.coms were out in the market. Given that, he would rather pick a couple sure bets and really work with them cradle to grave. It is also tough to have any real governance and control of an investment by just sitting on a board in China, especially if you are monitoring a deal from thousands of miles away. Secondly, he said it is tough to find good, experienced talent. That is one of his gaiting factors in ramping up his ventures. Finally, from an investment perspective, he would rather go consumer than enterprise. His first business was a systems integration play which spawned Linktone and Smartpay. He said it was difficult because the private companies you are selling to are really quasi-government agencies. It is tough to get paid and very tough to protect your intellectual property. At least on the consumer side, if you price your product or service appropriately, you can build a real PAYING user base and protect yourself from competitive threats with your base of subscribers. Look at the history of China going from Boeing to the automakers like GM which did joint ventures with companies in China only to have their IP recreated and used against them. I am sure GM could have protected themselves by charging less for their Buicks!

So there you have it from an experienced entrepreneur in China. His thoughts make a ton of sense.

]]>http://www.beyondvc.com/2005/04/venture_capital-2.html/feed5Go early, go late, or go homehttp://www.beyondvc.com/2005/04/go_early_go_lat.html
http://www.beyondvc.com/2005/04/go_early_go_lat.html#commentsTue, 12 Apr 2005 14:08:35 +0000http://localhost/wp_beyond/?p=263After having returned from vacation last week, I had the chance to reflect on the current venture and investing market. Yes, one of the big challenges is that there is still way too much money sloshing around in alternative assets. As I think about how to make money in this competitive environment and where to make new investments, I keep coming back to the thought that there is still opportunity very early or very late in a company's life cycle. On the late side, the tech sector is clearly maturing, growth is slowing, and forward P/E ratios relative to the S&P are pretty equal or even less indicating strong value. Combine this relative value with the fact that many tech companies, particularly large software companies, derive 50-70% of their revenue from annual recurring maintenance and you have an opportunity to buy out many of these businesses due to their predictable cash flow. I see this as a trend that will only accelerate in the next few years as you have venture funds, LBO shops, and even hedge funds get into the tech buyout action. Witness the recent Sungard deal and others. If the private investors are willing and able to pay $11.3b for a company then no public software company is sacred. This includes companies like Siebel and BMC who both recently missed their earnings targets. There is plenty of value left in these software companies that the public does not see, and therefore plenty of money to be made by smart investors.

On the early side, I continue to believe there is much innovation to be done. As the VC funds get larger and larger, they are under increasing pressure to put more dollars to work in every deal. Therefore, it remains quite difficult for the larger funds to dole out money in $2-4 million chunks, and the valuations are quite attractive at this stage. As a fund, we typically like to lead or co-lead the first institutional round (post-angel) where the company has a strong entrepreneur, innovative technology, and a handful of customers to prove the market need. Where I do not want to be is in a Series B or Series C round in a "hot, momentum" company. I have had a number of these companies come through my door, and I keep asking myself how a company which is only a feature of a much larger offering will create a significant return for the fund after having raised too much cash at too high a price. When I see "hot" companies with revenue less than $5mm raise capital at $50mm pre-money valuations, I start getting worried, and it further reinforces my thinking on where to make good investments.

In the end, making good investments is predicated on taking advantage of inefficiencies in the market. As we look at every new deal, we always revert back to the lesson that Warren Buffet's mom gave him, "Buy low and sell high." This includes investing on both sides of the barbell, very early with innovative technology in new markets and very late with established, out-of-favor software companies throwing off good cash flow. Considering that I am an early stage VC, I will have to play the later part of the barbell with personal investments in the public markets.

]]>http://www.beyondvc.com/2005/04/go_early_go_lat.html/feed2When competitors are acquired…http://www.beyondvc.com/2005/03/when_competitor-2.html
http://www.beyondvc.com/2005/03/when_competitor-2.html#commentsSat, 19 Mar 2005 11:30:00 +0000http://localhost/wp_beyond/?p=268It is clear that we are moving towards a consolidation phase in the technology sector. M&A activity has been heating up over the last 18 months as strategic acquirers are looking to bulk up and broaden their product offerings. During the last few months, we have had a few board discussions on this very topic. The conversations were not about us trying to shop any of our companies as I firmly believe that companies are bought and not sold (see an earlier post). Rather, our discussions focused on what happens when one of our competitors are acquired. Usually when a competitor is bought at a huge price the first reaction is why it wasn't me. The second reaction usually becomes fear as you begin to worry about what your competitor's product will do in terms of market share with a huge sales force and partner channel, strong brand name, and global infrastructure to support the customer growth.

Having been through this a number of times, this is the point at which you need to take a deep breath, stay the course, and look at the situation in a positive light. First of all, the majority of acquisitions fail. Secondly, your competitor will be inwardly focused and quite distracted for the first 6 months trying to integrate with the parent company. Finally, depending on how the acquisition was completed, employees will begin to leave as soon as they get the bulk of their money off of the table. When a competitor is acquired, rather than sulk and worry about why it wasn't you, try to aggressively exploit the situation and use it as an opportunity to grab market share and poach some experienced and talented personnel from your nemesis. Last year, for example, one of my companies was able to build an incredible sales team overnight, saving us six months of hiring and giving us an opportunity to hit the market harder and faster. So the next time this happens remember that you will more likely than not be in a better situation after your competitor is taken out of the market leaving you with plenty of opportunity to grow.

]]>http://www.beyondvc.com/2005/03/when_competitor-2.html/feed7Highlights from a recent VC panelhttp://www.beyondvc.com/2005/01/enterprise_smb_.html
http://www.beyondvc.com/2005/01/enterprise_smb_.html#commentsSat, 29 Jan 2005 01:45:00 +0000http://localhost/wp_beyond/?p=277On Thursday, I had the opportunity today to speak on a panel at the SAEC Global Venture Congress. Other panelists included the moderator, Scott Maxwell from Insight Venture Partners, Bob Gold of Ridgewood Capital, Robert Dennen of Enhanced Capital Partners, Todd Pietri of Milestone Venture Partners, and Roger Hurwitz of Apax Partners. Our panel was focused on helping entrepreneurs build a winning technology company. While there were a number of interesting thoughts presented by my fellow panelists, a few important highlights were the following:

1. Release early and often - It is better to release an imperfect product, get feedback, and continue evolving than trying to release the perfect product because you may never get there and run out of cash before doing so.

2. Filling the product management/marketing role early is key. Having a person who can shape the product and prioritize features by gathering the data in terms of what customers need near-term and what the market may need longer term is imperative. More often than not I find early stage companies that are engineer-driven that spend too much time on features that the market may not need. Avoid this problem early on and focus your limited resources on the right priorities.

3. Sales ramp - Do more with less and be careful of ramping up sales until you have a repeatable selling model. In other words do not hire too many sales people and send them on a wild goose chase until you have built the right product, honed the value proposition, identified a few target markets with pain, and can easily replicate the sales process and model from some of your customer wins.

While our panel was focused on helping entrepreneurs build a winning technology company, we also did have the opportunity to digress briefly and dive into business models that we liked. When Scott made all of us pick what type of company we preferred in terms of its target market from a list of enterprise, SMB, or consumer, it was interesting to hear the responses. I selected enterprise with the caveat that the company have a scalable business model (capital efficient, channel friendly, OEMable, possibly hosted, etc.) while a number of others voted consumer, SMB, and hosted software. If you asked the same question a few years ago, I am sure that enterprise would have been the overwhelming choice. While there was no consensus on SMB vs. consumer, it was quite clear that all of us had a limited appetite for investments in traditional enterprise companies predicated on large direct license sales.

]]>http://www.beyondvc.com/2005/01/enterprise_smb_.html/feed12It takes time to build valuehttp://www.beyondvc.com/2004/12/it_takes_time_t.html
http://www.beyondvc.com/2004/12/it_takes_time_t.html#commentsMon, 20 Dec 2004 10:17:44 +0000http://localhost/wp_beyond/?p=284During the boom, many VCs funded companies and created great exits within 12-24 months of funding. Before that time, the standard rule of thumb was that it took about 5-6 years for a company to reach maturity, profitability, and potentially become an IPO candidate. We did our own analysis of venture-backed software IPOs a couple of years ago (based on SEC filings, etc.) using pre-bubble data and this is what we found. Companies pre-1998 that went public received on average about $20mm of venture funding, were 6 years old, were EBITDA postive, and had a pre-IPO value of around $170mm (includes companies such as Peoplesoft, Intuit, Mercury, Documentum, Checkpoint, and Veritas). An interesting side note is that Veritas and Peoplesoft both went public in 1993 and were both acquired last week. This reminds me of a conversation I had this summer with a Veritas executive who said how difficult it was to scale beyond $1-2 billion in revenue and that size matters. There were a number of companies in that revenue band but very few above it like Microsoft, SAP, and Oracle. Getting back to the data on software IPOs, during 1998-1999, the companies that went public received around $30.0mm of VC funding, were 5 years old, were not EBITDA positive, and had an average IPO value around $375mm (includes comps like ISS, Micromuse, Art, Interwoven, Vignette, Informatica). The rule of thumb these days is that companies need to have around $50-60mm of revenue and be profitable for 1-2 quarters before going public. That is certainly a high bar and many companies will not get there.

Another way of looking at company maturity is to look at M&A data. This week's Plugged In column from Barrons has some great data on M&A in 2004 and how many of the companies that went public or were acquired were the very ones left for dead over the past few years. Of the 247 venture-backed companies which were acquired this year, 222 or 89.9% received its first venture funding prior to 2000 and 159 or 64.4% received its first round of funding between 1999 and 2000. Anyway, as I look at the data from Thomson Venture Economics and the NVCA, it is further proof that we are returning to normalcy in terms of the time it takes to build value.

As you can see from the chart at the left, average valuations of M&A deals while trending upwards in 2004 to $91mm, is still way below the $231mm and $338mm numbers in 1999 and 2000. As we return to a state of normalcy, the point is that it takes time to build value and nothing happens overnight. In addition, I also see the definition of what makes a great exit changing. If we are returning to a pre-boom normalized valuation level where you need to make good money at exits of $50-100mm and a home run deal is around $250mm, it behooves us to make sure that we invest in capital-efficient business models to generate the same 8-10x that we once could with an average deal size of $300-400mm (see an earlier post for more on this topic).

]]>http://www.beyondvc.com/2004/12/it_takes_time_t.html/feed3Strike while the iron is hothttp://www.beyondvc.com/2004/10/strike_while_th.html
http://www.beyondvc.com/2004/10/strike_while_th.html#commentsWed, 13 Oct 2004 10:06:05 +0000http://localhost/wp_beyond/?p=300I was speaking with a friend of mine today who mentioned that his term sheet for his Series A round fell through. Things looked great for the last 6 weeks and then the deal process went into a stall regarding intellectual property rights. To make a long story short, one of the co-founders of the company built the company's software in his spare time. However, he also had a full time job and decided ultimately to stay there rather than join the startup. Well, you can imagine that down the line the company that the co-founder worked for could potentially claim rights to the IP. Rather than leave this open to chance, the VC and the early stage company did the right thing and decided to clean up the ambiguity. Today, the IP is about to get assigned in the proper manner. However, the VC got cold feet and backed out of the deal.

So what happened? You see, deals take a life of their own. The more time it takes to close a deal, any deal, the more chance there is for it not to happen. Momentum is a powerful force but deal inertia can be more powerful. It sounds like the VC just got tired of the deal and also got cold feet as it seemed that a competitor or 2 cropped up during the deal closing process. This is not the only story of delayed deal closings. I was interviewing a CFO candidate for one of my portfolio companies yesterday and one of our discussion points was why a potentially large deal fell through. From his perspective, his side tried to overnegotiate the fine points, extending the closing out by a month. During that time the potential acquirer missed its numbers, got hammered by the street, and decided to back out.

My advice to you if you are going to raise a round is to make sure that you are prepared for all that may come at you in terms of due diligence. Have your financials clean, make sure your IP is owned by the company and not by any consultants, and have your references teed up to talk to potential investors. The more prepared you are the more impressed the VC is and the quicker the deal closes. One other point to remember, do not overnegotiate. Figure out the big picture of what you want in a VC partner and deal, negotiate those points but be willing to give up other points that the VC cares about. I have been in a few situations where an entrepreneur overnegotiates, and it certainly makes me wonder what it will be like to work with that person post-closing. Will there be give-and-take in our VC-entrepreneur relationship or will that entrepreneur always try to get his way?

]]>http://www.beyondvc.com/2004/10/strike_while_th.html/feed2Opportunties for Enterprise Software Investmentshttp://www.beyondvc.com/2004/09/opportunties_fo.html
http://www.beyondvc.com/2004/09/opportunties_fo.html#commentsThu, 30 Sep 2004 01:59:11 +0000http://localhost/wp_beyond/?p=304I had the opportunity to spend a few hours today at an Intel Capital event for their portfolio companies and VC friends. While a great way to network with fellow investors and meet new companies, I particularly enjoyed a talk given by Chris Thomas, Intel's EStrategist, on the future of software in the enterprise. While none of the ideas were new, I liked how he laid out the major themes in computing and software in a well-thought out presentation.

Here are some of my notes from that discussion.

Chris' view is that we are moving towards a service-oriented world, where enterprises can tap applications and resources on demand and on the fly. Yes, we have heard this theme over the last few years in a number of different incarnations. In fact, I got a chuckle from Chris' list of marketing slogans from all of the large vendors trying to trademark their specific vision on the service-oriented world (N1, on-demand, etc.). Anyway, despite the hype of SOA (service-oriented architectures), it is beginning to happen, it is real, and it is still early. As we move into this world of SOAs, there will be tremendous opportunities for software investment as enterprises consolidate, modularlize, and virtualize their data centers. Chris highlighted the 5 buckets or themes that mattered to him:

1. Software and data delivered as services -think ASP model, think modular, software components that perform a specific task, which can be used as building blocks and combined with other components via web services to solve a specific business problem -this will be the new way to build software and go-to-market -he gave an example of how AT&T used a combination of hosted software vendors and their APIs to deliver an order routing solution for a customer in 2 weeks instead of 9-12 months -a side note - as we move into an increasingly global world, no need to worry about software piracy since you can't steal a service but you can steal sofware

2. Hardware as a virtualized resource -view hardware as one set of services -manage capacity on demand -new hardware=new software opportunity

3. Autonomic data sources (RFID, tags, smart sensors) -Chris gave an estimate that an average retail store could have up to a terabyte of data from RFID alone -think about the opportunities here to process, filter, store, and understand all of this data -how will all of this data flow through the network in an optimal way? -once again, more investment opportunities in software

5. Services cross firewalls (security) -if we move to this service-oriented world where partners, machines, and applications access data on the fly, there will be tremendous need for security

Chris' bottom line was that asynchronous XML messages are what makes this service-oriented world possible. We are just at the beginning phases, a new architecture is needed and with that comes new and interesting opportunities for software investments. I totally agree here as most of the service-oriented talk from many of the large tech vendors is still a pipe dream and more marketing than fully functioning product. In addition, most enterprises are experimenting with various aspects of the above themes but far from prime-time in terms of deployment.]]>http://www.beyondvc.com/2004/09/opportunties_fo.html/feed0Thoughts on picking your VChttp://www.beyondvc.com/2004/09/thoughts_on_pic.html
http://www.beyondvc.com/2004/09/thoughts_on_pic.html#commentsTue, 28 Sep 2004 16:48:00 +0000http://localhost/wp_beyond/?p=305Jeff Nolan has a comprehensive post on choosing your VC. I totally agree with Jeff's view that not only should entrepreneurs do their diligence when choosing a VC to invest in their company, but VCs should also do reference checks on their new partners. This includes understanding potential board dynamics and making sure investor interests are aligned. Put it this way, a bad board with bad dynamics rife with egos and competing interests can bring a company down quickly. Some areas to explore include understanding the size of fund, the amount of dry powder, the appetite for risk, the view on the existing business plan, team, and management gaps to fill. As an example, a smaller fund with less dry powder may want to grow less agressively than a larger fund with more capital to invest. Not that the situation above can't work, but it is incumbent upon the entrepreneur and existing VC to understand the potential areas for conflict and make sure they get comfortable with them. This means that the entrepreneur and existing investor should spend the appropriate time to get to know their potential partner (if they do not already know them) in addition to doing the right reference checks (see Jeff's post for areas to dig). ]]>http://www.beyondvc.com/2004/09/thoughts_on_pic.html/feed0Running an efficient board meetinghttp://www.beyondvc.com/2004/09/running_an_effi.html
http://www.beyondvc.com/2004/09/running_an_effi.html#commentsTue, 14 Sep 2004 12:52:42 +0000http://localhost/wp_beyond/?p=307Board meetings can be a gigantic waste of time if not run appropriately. On the flipside, they can be a valuable source of input and guidance for a management team in the pursuit of maximizing shareholder value. While there are a number of different ways to approach and run a board meeting, I thought I would outline a few of my philosophies on them, and what I expect from my portfolio companies in terms of content.

1. Be prepared: Board meetings are like theater. Like any play, I expect the CEO to have a well thought out and scripted agenda for the meeting. The most efficient way to do so is to lay out an agenda and get feedback pre-meeting from the other board members to ensure that the board covers appropriate topics and allocates the right amount of time for each one. From an update and preparedness perspective, the CEO should always go into the meeting having a complete understanding of where the various board members stand in terms of any major decisions. There should be no surprises. This means that the CEO should have individual meetings and calls in advance of the board meeting to walk each director through any decisions that need to be made and the accompanying analyses behind them.

As far as board packages are concerned, I typically like to receive them at least 48 hours in advance so I can process the information and be in a position to ask intelligent questions.

2. Timing: For an early stage company, I typically like to meet in person every 4-6 weeks. Lately I have been skewing to more of a 6 week time horizon. I believe that timeframe gives the team enough time to execute on some of the goals outlined in the meeting and not spend their time constantly doing powerpoints for the board.

3. Content: As much time as possible should be spent on discussion, rather than update. What I want to know about is the management team's priorities and why, how they are tracking against those goals, and what keeps them up at night with respect to meeting their objectives. What I do not want is a litany of presentations and tech demos with no discussion. At board meetings we should continually evaluate and monitor the company's strategic goals, understand where the market is and how we are positioned vis a vis our competitors, and discuss management's plans, priorities, and performance.

While there is no right way to run a meeting, having a framework can be a great way to lead organized and informed discussions. A good framework that I like to use is having the CEO give a high level company overview followed by a department level drill down delivered by the functional head. Typically, in the context of these department-level updates, discussion will ensue on milestone progress, roadblocks or hurdles to realizing the goals, resource constraints, performance of various employees, and any potential addition or subtraction to the list of goals.

Listed below is a standard framework that I like to use in board meetings along with some sample reports that help guide the discussion and allow directors to review performance. By no means is this meant to be an exhaustive list. Alot of these reports serve as good leading indicators for potential areas of problem down the road and none of these should require management to reinvent the wheel.

Company Summary by CEO -Company overview discussing recent performance with highlights on each department -Summary of key matters to be presented and decisions that need to be made - remember that decisions can only be made if the directors are all familiar with the issues and have had a chance to review the supporting analyses and risk factors pre-board meeting

During the meeting, it is the CEO's responsibility to cover the agenda and keep the directors on topic and focused. That means if the conversation runs off on a tangent the CEO has to bring everyone back in line and table the discussion for another meeting.

R&D: -Summary development plan of key features to be delivered for quarter and current progress -Bug report broken out by severity-should also track resolution and time outstanding against prior months/quarters

Depending on the stage of company, the time of year, or crisis of the quarter, there will be a much deeper dive into various departments to discuss topics such as product roadmaps, the budget, the sales plan, and partnership strategy. The more information the board has in advance by way of supporting analysis, the more informed the discussion will be.

At the end of the board meeting, I typically like to have a board-only session where the members can not only make the requisite board approvals for stock option grants and the minutes but also feel free to discuss any pertinent or sensitive topic like executive compensation, budget planning, financing/exit strategy, or concerns about personnel. This session allows the directors to evaluate any management proposals and comment on performance in a candid and open forum without embarassing or browbeating any executive. While a board meeting should only last 3-4 hours for the most part, you have to remember that much of the work of any board happens outside of the formal meeting and through the informal daily/weekly interactions with the mangement team via telephone, email, IM, and face2face meetings. This is where the heavy lifting happens. When you find yourself diving too deeply into a discussion on sales tactics, for example, the board may be better off saving that conversation for after the meeting. Before you present next year's plan to the board, you should run it by a few of your more active board members for comment and advice before rolling it out to the whole board. If you find yourself having 8 hour board meetings, then you are probably getting too focused on the details (breakout sessions or scheduling subsequent informal meetings to drill into a particular topic is more appropriate) and not doing enough preparation in advance of the meeting.

If you are more interested in the board's role and who should be on the board, I suggest reading some excellent posts from fellow VCs Brad Feld, Fred Wilson, and Jerry Colonna.

UPDATE: Fred Wilson adds to my post emphasizing the non-executive board discussion. As Fred says, it is always a great idea for the non-executive directors to be in synch wih their thoughts and overcommunicate prior to and after the board meeting. This also means having the right people in and out of the room. I totally agree.

]]>http://www.beyondvc.com/2004/09/running_an_effi.html/feed11Why I blog as a VC?http://www.beyondvc.com/2004/02/why_i_blog_as_a.html
http://www.beyondvc.com/2004/02/why_i_blog_as_a.html#commentsMon, 23 Feb 2004 23:46:57 +0000http://localhost/wp_beyond/?p=365Recently, a number of people asked me why I blog as a VC. Isn't privacy a good thing for VCs? Don't you want to keep the good ideas to yourself? For the past couple of years, I had my own personal blog which I mainly used as a bookmarking tool so I could retrieve interesting news stories and my running commentary from any web browser. As I made the leap to the public blogging world, I really did not know what I would find until I threw myself out there.

So, after my first 6 months or so, here is what I like about blogging. Blogging provides me with an outlet for my views on technology, venture capital, and other current affairs. Yes, like most VCs I am opinionated, and what better way to express them than through a blog. Instead of beta testing a product, I get to beta or alpha test my opinions or thoughts and receive instant feedback no matter how far-fetched my ideas may be. I find this incredibly valuable as a number of people either email me directly or post comments and tell me I am off the mark, on the mark, or point me in new directions to further research my ideas. People send me information about new companies or even their resumes based on some of my current interests. As a VC, this is a great way to have an ongoing dialogue with an active and participatory audience. BTW, any product companies out there should think about using blogs and other technology like RSS to build long-term relationships with their customers and get instant feedback on product direction and features. Secondly, based on my posts, I have built some new relationships by engaging in conversation either directly or indirectly through my blog. Last week at DEMO, it was actually nice to have met some of the bloggers that I regularly read and with whom I share similar interests. Next, understanding the value of the blog, I actively read and subscribe to a number of other people's feeds to learn about the hot topics of the day and to understand what the early adopters are currently thinking before a new technology or idea goes mainstream. I get to listen and participate in on the conversations about the next product or idea that will reach the tipping point as many of today's innovative thoughts gather steam and build momentum through a word-of-mouth or word-of-network manner. Of course, the danger can be drinking your own kool-aid from the blogger community (think Howard Dean-he seemed really hot with the bloggers but did not fare so well in the primaries) so some balance is required here. Finally, it is alot of fun, and I hope you keep visiting and actively commenting either privately or publicly.

]]>http://www.beyondvc.com/2004/02/why_i_blog_as_a.html/feed5Demo reflectionshttp://www.beyondvc.com/2004/02/demo_reflection.html
http://www.beyondvc.com/2004/02/demo_reflection.html#commentsWed, 18 Feb 2004 13:15:02 +0000http://localhost/wp_beyond/?p=366I try to limit the number of conferences that I attend every year to a handful. Besides Esther Dyson's PC Forum, there are few others that I like to attend regularly. However, I have to say that Chris Shipley's Demo was a great show. Read more about it on Ventureblog.

Being on the east coast, it was great to catch up with a number of west coast VCs that I have not seen in awhile. Sure there were lots of great companies at the conference, but getting together with the other VCs to trade notes about deals that were in our pipeline was extremely valuable. For any company raising capital these days, it was clear to me that we are all eager to put money to work. There were all flavors of investor interest, some were excited about mobile telephony and cell phone games, others continued to like security and data center-related deals, while some liked consumer deals. The common theme I heard echoed from all of us was that management was key. When someone brought up a deal, it was not long before management was mentioned and in the context of how successful they were in prior startups. Yes, this is nothing new, but I thought I would just reiterate how important it is to have the right team and prior experience really helps! It was also clear that many of us were interested in blogging and understood the groundswell building but were not quite sure how to capitalize on that from an investment perspective. So all in all, it was a great conference and one that I plan on attending next year.

]]>http://www.beyondvc.com/2004/02/demo_reflection.html/feed1The VC/entrepreneur relationshiphttp://www.beyondvc.com/2004/02/vcs_dont_like_s.html
http://www.beyondvc.com/2004/02/vcs_dont_like_s.html#commentsMon, 02 Feb 2004 06:00:00 +0000http://localhost/wp_beyond/?p=373Many of you have heard the analogy that the VC due diligence process is like dating and getting the investment is akin to being married. For all of you in relationships, you also understand that honest and open communication is one of the keys to success. Similarly, the VC and entrepreneur relationship should be built on the same foundation. Trust me, I know when one of my portfolio companies closes a new and important deal because good news always travels fast. However, bad news does not travel so fast. I urge the entrepreneur to share the bad news just as quickly as the good news. Why? If you tell the VC sooner rather than later, we can help. If you have an experienced VC as an investor, you can bet that he has seen the movie before and at the very least can offer advice and words of wisdom to help you in your decision making process. If you wait for the board meeting, it is too late for us to have any impact. Secondly, VCs don't like surprises. Err on the side of too much communication initially than too little. Sure, we won't be happy with bad news. We're even unhappier about bad news when we are told at the 11th hour with no ability to influence the decision. You can tell alot about your VC by his demeanor when confronted with tough and unexpected negative situations. In fact, in your investment process, ask yourself this question, "When things are going bad, is he going to roll up his sleeves and help or simply yell and bark orders." As Clint Eastwood said in the movie The Good, The Bad, and The Ugly, "There are two kinds of people in this world. Those with loaded guns and those who dig. You dig." Hopefully, you won't have the VC with the loaded gun, but rather the one who will pull out a shovel and help.]]>http://www.beyondvc.com/2004/02/vcs_dont_like_s.html/feed0Companies are bought and not sold (continued)http://www.beyondvc.com/2004/01/companies_are_b.html
http://www.beyondvc.com/2004/01/companies_are_b.html#commentsWed, 07 Jan 2004 00:01:38 +0000http://localhost/wp_beyond/?p=380Fred Wilson has some good commentary on an earlier post. We seem to agree that at the end of the day if you build a real business with sustainable cash flow, the exit will take care of itself. I seem to have oversimplified the "IPO potential" comment for the sake of keeping my post short. To further explain, my only point regarding "IPO potential" is that using pre-bubble metrics a company cannot go public (for the most part) unless it has already been profitable for at least 2 quarters, have a diversified customer base, and be a leader in its market. In other words, it must be a real business with sustainable cash flow. When I look at making new investments, being able to look like the above within a reasonable time frame is a prerequisite for me. Those are the types of businesses that can be bought and not sold.]]>http://www.beyondvc.com/2004/01/companies_are_b.html/feed0Companies are bought and not soldhttp://www.beyondvc.com/2003/12/besides_taking_.html
http://www.beyondvc.com/2003/12/besides_taking_.html#commentsTue, 23 Dec 2003 11:07:03 +0000http://localhost/wp_beyond/?p=383Besides taking a brief time out to celebrate the Expertcity deal, I have spent a fair amount of time interviewing VP candidates for one of my portfolio companies. As with any smart executive who cares about the value of equity, the question I am often asked is, "What is your exit strategy." My answer is quite simple-every company we invest in must have IPO potential (IPO potential as defined by non-bubble metrics) but along the way if someone makes an offer for the company because it is an attractive, rapid growth business, we can evaluate it appropriately. What we will not do is invest for the sole purpose of having a company acquired. That is a losing proposition. The ultimate way to create value is to have a real business with real cash flow and a strong balance sheet where you can show your potential acquirer that you do not need any other sources of funding besides self-sustaining growth. VMWare certainly used this approach when it decided to sell to EMC. You have to be able to show your potential acquirer that they are not the only way to create liquidity for your business.

Companies are bought and not sold. What I mean by that is good exits usually happen when someone tries to buy your company rather than you trying to sell your company. In other words, these good exits usually happen when your company is approached by a potential buyer-i.e., you are seen as desirable in someone else's eyes rather than you telling someone how pretty you are. Typically, these types of exits result from already existing, revenue-generating business relationships. It is not that big of a leap for an aquirer to make an acquisition offer on the higher end of a valuation range knowing how its partner does business, how the management teams work together, and how the product sells through to its customers. Other times it can happen when your company consistently beats out a competitor in the market and is seen as a thorn in the side. In either case, your company is a known quantity and the potential acquirer has seen you perform in the market.

What does this all mean? My advice to entrepreneurs and management is quite simple: if you focus on what you can control (growing and managing your business), then the external factors (exit strategy) will take care of itself. However, if you try to force it and shop your company, that shows a sign of weakness and more often than not will result in a fire sale. Remember, companies are bought and not sold. If you do not get the price you want, it will not matter since you have a business built for the long-term. For a strong, well manged company, opportunities will always present themselves.

]]>http://www.beyondvc.com/2003/12/besides_taking_.html/feed1Citrix buys GoToMyPc maker, Expertcity-great day for ASPshttp://www.beyondvc.com/2003/12/congratulations-2.html
http://www.beyondvc.com/2003/12/congratulations-2.html#commentsFri, 19 Dec 2003 01:39:05 +0000http://localhost/wp_beyond/?p=384Congratulations to Expertcity and Andreas, John, and Klaus. It has been great to work with you from a board level over the last 4 1/2 years. When the transaction closes, I look forward to writing a little more about how you were able to persevere through some tough times, launch new product, stay focused on leveraging the core screen sharing technology, and build a high growth business in a completely new market. Not only were you an early player in remote access, but you also were one of the first ASPs out there.

Expertcity is not the only ASP making headlines today. Salesforce.com filed to go public and raise $115mm. As I mention in an earlier posting about Google and IPOs, pre-bubble, it took companies 4-6 years from their first round of funding to IPO/acquisition. During the bubble it took 1-2 years. While I am excited about today's announcements and other recent deals like VMWare (bought by EMC) and Zonelabs (bought by Checkpoint), it is obvious that we have returned to a pre-bubble mentality and the companies that will be significantly rewarded are the ones that embody the philosophy of building real businesses with real revenue and cash flow. Well, isn't that just business 101? Yes, and this is great news as it is something we can all understand.

]]>http://www.beyondvc.com/2003/12/congratulations-2.html/feed0Software packaginghttp://www.beyondvc.com/2003/12/om_malik_exseni.html
http://www.beyondvc.com/2003/12/om_malik_exseni.html#commentsWed, 10 Dec 2003 15:03:50 +0000http://localhost/wp_beyond/?p=386Om Malik (ex-senior writer for Red Herring) has been writing about the commoditization of hardware. In a recent article in Business 2.0 titled "The Rise of the Instant Company," Om talks about how hardware has become commoditized to the point where hardware expense as a cost of goods sold is de minimis. In other words, companies can now cobble together off-the-shelf-hardware with proprietary software to create companies that can quickly and cost-effectively go after large incumbents. This is a great point and what it comes down to is that software companies can now "package" themselves as hardware plays and successfully leverage the hardware channel from a sales perspective. This is quite attractive from a VC perspective because now we get the opportunity to invest in business that can grow rapidly like a hardware play at software like gross margins (depending on price point 65-85%).

Given this backdrop, I believe that we will see 3 types of software companies in the future. The first will be companies selling expensive applications which will rely on extensive professional services to install and customize. This is the market dominated and characterized by large companies like SAP, Siebel, Peoplesoft and their ancillary professional services partners like Accenture, IBM Global Services, and other consulting companies. The second will be companies that will sell their software as a service (ASP model). These are companies like Salesforce.com, Liveperson, and Expertcity (LPSN and Expertcity are both fund investments) which took the above market segment and made it really easy for customers to buy and in effect, removing the complexity of managing and installing the software. Finally, there will be software companies that have a componentized product that is easy to install which can and may be packaged into an appliance to leverage the channel sales model. This could mean that companies are selling their own appliance or OEMing their software to hardware vendors who in turn sell an appliance. Companies like Neoteris and Network Appliance fit this model. From a venture perspective, the sofware companies that are most interesting to me are the ones with ASP and appliance offerings. In this posting, I would like to focus on software packaged as an appliance.

While the average selling prices for companies that leverage the channel are much lower than pure, direct enterprise sales, I like the fact that these types of companies can utilize a seed and harvest model. In the seed and harvest model, companies that have lower price points can seed a number of customers with a low, entry price product and go back to them later to harvest accounts to sell multiple instances of the product. While the initial sale may not be $1mm upfront, you may be able to get $1mm in the life of a deal. The benefit for the software company is hopefully a shorter sales cycle (it is easier to get sign off for $50k vs. $500k) and the ability to leverage other people's feet to sell your product.

From a VC perspective, I like to see companies which can leverage other people's sales forces to grow. Yes, your company will give up some points in margin and also lose some control over customer relationships, but will hopefully make up for it in terms of more volume. For early stage companies, it is already quite difficult and expensive to sell into Fortune 1000 accounts. Many of the companies under the first model (pure enterprise license sales) need expensive direct sales forces which sell high-priced products which have long sales cycles. If the price point of your product is not high enough, then there is little likelihood of you ever building a real, profitable software company from direct sales alone. In addition, if you want to get the excitement and interest of service providers like IBM Global Services and Accenture, you better be able to drive $10s of millions of dollars of service revenue.

Just to be clear, I am not saying that software companies do not need direct sales forces as it is incredibly important in a company's early phase of development to own the customer relationship and gain valuable feedback about its product. In fact, no matter what kind of software company you aim to be, you need to have customers to get channel partners, know what it is like to sell to an end customer, and successfully manage an end customer in order to train your channel and OEM partners. Therefore, most companies will require some form of direct sales force to begin with, but over time, I like to see the mix of revenue moving towards greater than 50% into the channel and OEM model. What this means, at least for me, is that selling $1mm software licenses with 3-6 month installation processes is not interesting and has gone the way of the dinosaur from an attractiveness perspective in terms of funding. The fact that hardware has become commoditized has really opened up new ways of selling software and building companies, ways that can be quite attractive for both entrepreneurs and venture capitalists.

]]>http://www.beyondvc.com/2003/12/om_malik_exseni.html/feed0Capital Efficient Business Modelshttp://www.beyondvc.com/2003/11/yesterday_i_par.html
http://www.beyondvc.com/2003/11/yesterday_i_par.html#commentsWed, 19 Nov 2003 23:09:39 +0000http://localhost/wp_beyond/?p=391Yesterday I participated on a panel at the Mid Atlantic Venture Conference on the current venture capital market and how to raise capital. While this was a plain-vanilla panel about venture investing, there was one theme that was echoed by a number of my fellow panelists from Rho Ventures, New Venture Partners, Edison Ventures, and Cross Atlantic-today's world requires software companies to have a capital-efficient business model. What is a capital-efficient business model and why does it make sense? From my perspective, a capital-efficicent model is one that allows a company to use as little cash as possible to generate significant growth and become self-sustaining and profitable. Growth at all costs without profitability does not get you there and neither does profitability with no growth. Finding the right balance is important. Given this backdrop, the real question is how does today's VC generate a 10x return? Yes, that is easier said than done, but let me walk you through why it is imperative for VC investors today. During the bubble years, a $500mm to $1b exit for a software company was not uncommon. A bad deal for a VC was a $100mm sale. However, many of the software companies during the bubble years required $50mm or more to create meaningful exit value, and in many cases the companies were still not profitable. Today and into the future, I believe we will return to a sense of normalcy where a great exit for a venture investor will mean $100-200mm of value. If it takes $50mm or more to get there you are talking about a 2-4x multiple for a GREAT deal. That is not terribly exciting. A capital efficient software model should only require $20-25mm to get to profitability. With those numbers a VC could earn 4-10x their investment, even at today's reduced values. Given my perspective on what ultimate exit values will be, it will serve the entrepreneur and venture investor well to do as much as they can with as little capital. This is doable-looking at history, Peoplesoft only raised $10mm of venture funding, Documentum raised $13.5, and Veritas raised $6mm. This does not mean skimping on growth, but it requires companies to:

1. Focus on getting product into the hands of its customers earlier rather than later-do not build the perfect product (see an earlier post); 2. Grow carefully-do not ramp personnel too far in advance of revenue; 3. Leverage offshore resources where appropriate; 4. Leverage reseller and OEM relationships (direct sales is way too expensive).

Each bullet point above deserves its own lengthy discussion, and I hope to address some of these in future postings. The impact this will have on the industry will mean that venture capitalists will need less capital for each company resulting in smaller funds and a better ability to generate multiples of invested cash for its investors. For today's entrepreneurs, it will mean that they rethink their go-to-market strategy and remember to balance growth with getting to profitability sooner.

]]>http://www.beyondvc.com/2003/11/yesterday_i_par.html/feed0netForensics raises $12 millionhttp://www.beyondvc.com/2003/11/congratulations-3.html
http://www.beyondvc.com/2003/11/congratulations-3.html#commentsSat, 15 Nov 2003 07:05:58 +0000http://localhost/wp_beyond/?p=393Congratulations to netForensics! We are excited to have Nomura as a new investor and look forward to them helping us with our international expansion. For those of you who are interested in security, please see an earlier posting on Microsoft and Securing the Perimeter.]]>http://www.beyondvc.com/2003/11/congratulations-3.html/feed0Strategic Investors-the Good, the Bad, and the Uglyhttp://www.beyondvc.com/2003/11/i_had_the_oppor.html
http://www.beyondvc.com/2003/11/i_had_the_oppor.html#commentsWed, 12 Nov 2003 22:07:58 +0000http://localhost/wp_beyond/?p=394I had the opportunity to speak on a panel today at the Corporate Venture Capital Summit. There was an interesting crew of speakers representing corporate-related venture activities for companies such as Hitachi, Intel, Nokia, Panasonic, Siemens, and Kodak. While one moderator cited numbers showing that the amount of corporate venture investing in terms of dollars is down 50% from 2000, in my mind, that does not seem that different from the change in the general VC market. While there are less corporate investors today, there are also less VCs. From the 3 panels today, it was very clear that the nature of corporate investing, if I can lump all the different players in one bucket, has changed. Like today's VC, they are doing less deals. However, the deals that they are doing need to be more strategic and less opportunistic. This means that someone in a product group needs to somehow get behind the company and act as an internal sponsor. This does not mean that a company looking for funding will get a strategic partnership before a financing.

One of the questions I was asked today was how an early stage company can make a strategic investment successful. Here is what I had to say:

1. Show me the revenue-I would rather have an OEM or reseller deal than a strategic investment. Strategic investments do not mean anything if you are not going to generate revenue for your company and for your partner. In addition, when you sign a reseller or OEM contract it means that the hard work has yet to begin-an early stage company has to throw resources behind a partner to make things happen.

2. Go in with your eyes wide open-what is strategic for you may be tactical for your partner. In addition beware of deal terms that may limit your ability to be flexible. These include rights of first refusal, exclusivity, and other non-standard VC terms.

3. A strategic investment is not an exit strategy-in many cases, it could actually limit your exit opportunities as other competitors to the strategic investor may not want to partner with you.

4. Do your due diligence-how successful has your strategic investor been in setting up relationships for other companies, how much juice does the strategic investor have to make things happen?

5. Manage expectations-constant communication between both sides is key to maintain a healthy relationship.

I could go on and on here but I just wanted to highlight a few of my top of mind thoughts. Suffice it to say that looking at the 30+ companies we have funded, partnering with strategics has been a mixed bag. There have been some that have worked out well and others that have not. However, if done right, I do believe that both sides could substantially benefit from a relationship as long as there are real dollars being generated.

]]>http://www.beyondvc.com/2003/11/i_had_the_oppor.html/feed2Google weighs IPO next yearhttp://www.beyondvc.com/2003/10/yes_this_is_old.html
http://www.beyondvc.com/2003/10/yes_this_is_old.html#commentsSat, 25 Oct 2003 23:42:38 +0000http://localhost/wp_beyond/?p=400Yes, this is old news and much anticipated.

Just one word of caution for us venture capitalists and entrepreneurs-let's not equate this to a return to the mid-to-late 90s IPO boom. According to many investment bankers I have met with, today's companies, unlike yesterday's, need to have $10-20mm of revenue a quarter, be profitable now and not in 8 quarters, come from an established and not an emerging sector, and have a valuation based on real earnings and growth and not one on revenue. One additional note-many companies from the bubble era were able to go public 1-2 years from their first round of venture capital. If you assume a 2004 IPO for Google and Salesforce.com, both would have taken 5 years from their first round of venture capital. One can argue that Google could have gone public much earlier, but the point here is that patience is key. If you look at the historical data, subtracting out the bubble period, it traditionally took 4-6 years of development from the first round of venture financing for a company to go public.

Trust me, this is great news for venture capitalists and entrepreneurs, but let's remember that when and if Google and Saleforce.com go public next year that the world has changed and real earnings and cash flow matter this time.

]]>http://www.beyondvc.com/2003/10/yes_this_is_old.html/feed0NYC 2.0http://www.beyondvc.com/2003/10/i_recently_spok.html
http://www.beyondvc.com/2003/10/i_recently_spok.html#commentsTue, 14 Oct 2003 22:05:50 +0000http://localhost/wp_beyond/?p=406I recently spoke with Richard Adams, founder of Referral Networks, which was later sold to Peopleclick. He has started a new venture, RipDigital, which does the dirty work of converting CD collections into MP3 libraries. Basically all you have to do is place an order on the website and the company ships a box to you, you pack your CDs into the box, RipDigital does the conversion, and then ships your new library on either a DVD or portable hard drive along with your CDs. It is truly frictionless commerce. While interesting, this is not the only project that Richard is working on these days.

I have also been staying in touch with Owen Davis who co-founded Sonata (Thinking Media) with Vid Jain. Owen and Vid are back at it again with a new company, Petal Computing. Petal, according to its website, provides software that allows a dedicated group of PCs to operate like an enterprise server or mainframe. Its solutions are further optimized for the high performance needs of the financial world, including modeling, cash management, risk analysis and pricing. In other words, Owen and Vid have created cluster computing software which is highly specific and focused on the financial sector. While the cluster computing space is a competitive market with some established players, I like their approach to building the business. They have actually been working on the software for the last 2 years.

In fact, many NYC 2.0 entrepreneurs (those NYC veterans on their second venture-I hesitate to use the word Silicon Alley since that leaves a bad taste in many people's mouths) are starting companies with a new philosophy to build businesses that uniquely solve a real customer problem. Embedded in the new way of starting companies is strong financial and product discipline. In other words, NYC 2.0 entrepreneurs have learned to keep the burnrate low until they have a great product they can sell repeatedly with feedback from living, breathing beta customers. With this philosophy, these entrepreneurs just may have a better opportunity to create some real businesses that will generate meaningful cash flow.

BTW, I placed my order with RipDigital today for 250 CDs today and will report on the finished product at a later date.

]]>http://www.beyondvc.com/2003/10/i_recently_spok.html/feed0Price isn’t everythinghttp://www.beyondvc.com/2003/10/i_had_breakfast.html
http://www.beyondvc.com/2003/10/i_had_breakfast.html#commentsWed, 08 Oct 2003 22:16:42 +0000http://localhost/wp_beyond/?p=409I had breakfast with a friend the other day, and he was in the process of a bankruptcy filing for his startup. We started talking about why his wireless company had failed and one of the main reasons he cited was that the price was too high. Many of you may ask why is that a problem. Isn't getting a high price a great thing? The term sheet that the company signed was led by a strategic investor and contingent on finding another VC as a co-lead. While he had some strong interest, no other VC or purely financially driven investor was willing to step up at that price. The only other term sheet he had was at a much lower valuation but in his mind a little too onerous. He was willing and ready to take the term sheet, but he had made a promise to his team of 10 that he would make sure they got some backpay as part of the deal. While it was a hard decision, I applaud him for sticking to his deal with his team. Consequently, the company had no other choice but to shut down since it was not at a stage to generate meaningful revenue. So what can other entrepreneurs learn from this?

1. Price isn't everything-sometimes too high of a price can cripple your company. Other investors may not want to fund the company, and you may set unrealistic expectations for you, your employees, and your investors.

2. VCs like sweat equity. Don't hire people that expect to get paid back salary. Isn't the whole point of working at a startup to build real value through equity? If your employees want backpay then you probably have the wrong people for your stage of company. It is a tough proposition for us to fund a $3mm round and have $500k get paid out as salary. This is easy for me to say as a VC, and it may sound self-serving, but it is true.